SSE Annual Report 2009

Scottish and Southern Energy plc Annual Report 2009

Producing energy in a more sustainable way with new

developments like the Glendoe hydro electric scheme.

Helping make electricity and gas more affordable by offering a ‘better plan’ and installing insulation.

Ensuring electricity supply is reliable through investing

in networks in England and Scotland.

Providing more capacity for the UK to maintain dependable

supplies of gas through development at Aldbrough.

SSE’s core purpose is to provide

the energy people need in a reliable

and sustainable way.

Our Values

Safety, service, efficiency, sustainability, excellence, teamwork – the SSE SET.

Our Strategy

To deliver sustained real growth in the dividend payable to shareholders through the efficient operation

of, and investment in, a balanced range of regulated

and non-regulated energy-related businesses.

Our Team

More than 18,500 people, working from power stations, depots, customer service centres, offices and shops.

* Unless otherwise stated, this Annual Report describes adjusted operating profit before exceptional items, the impact of IAS 32 and IAS 39 and after the removal of taxation and interest on profits from jointly-controlled entities and associates. In addition, it describes adjusted profit before tax before exceptional items, the impact of IAS 32 and IAS 39 and after the removal of taxation on profits from jointly-controlled entities and associates. It also describes adjusted earnings and earnings per share before exceptional items, the impact of IAS 32 and IAS 39 and deferred tax.

Key Performance Indicators

Adjusted Profit Before Tax* – £m Operating Profit* – £m

2007 2008 2009 2009 1,253.7 Generation and Supply 632.5 711.1 832.0 Energy Systems 471.1 544.4 584.2 2008 1,229.2 2007 1,079.3 Gas Storage 55.9 50.9 42.7 15.5 2006 873.9 Telecoms 13.9 14.3 Contracting, Connections 2005 732.1 and Metering 61.7 68.7 74.8

Dividend – pence per share Dividend – composition

66.0 Interim 30% (19.8 pence) 60.5 Final 70% (46.2 pence) 55.0 46.5 42.5 37.7 35.0 32.4 30.0 25.7 27.5

20001999 20001999 2001 2002 2003 2004 2005 2006 2007 2008 2009

Energy Customer Numbers – millions Energy Customers Numbers – composition

2009 9.05 Electricity (residential) 56% (5.10 million) 2008 8.45 Gas (residential) 2007 7.75 39% (3.50 million) 2006 6.70 Electricity and Gas (business) 2005 6.10 5% (0.45 million)

Capital Expenditure – £m Capital Expenditure 2008/09 – %

2009 1,279.8 Thermal Generation 17 2008 810.3 Renewable Generation 41 2007 663.4 Power Systems 25 2006 502.1 Gas Storage 4 Other 13 2005 383.5

Corporate Responsibility

2005 2006 2007 2008 2009

Lost-time and Reportable Accidents – per 100,000 hours worked (2007-2009 figures show Total Recordable Injury Rate) N/A 0.08 0.05 0.04 0.07

0.49 Power Station CO2 Emissions – kilograms per kWh N/A 0.62 0.55 0.50

Customer Minutes Lost – SEPD 84 71 72 67 66

Customer Minutes Lost – SHEPD 82 65 77 72 75

Contents

01 Chairman’s Introduction 02 Overview of our Business 06 Our Strategy 08 Chief Executive’s Statement 18 Financial Overview 19 Dividend 20 Investment and Capital Expenditure 20 Financial Management and Balance Sheet 22 Tax 22 Convertible Bond Maturity and Authority to Purchase Own Shares

23 Corporate Responsibility 25 Performance Indicators 28 Generation and Supply 30 Generation 38 Supply 42 Networks 44 Electricity Networks 46 Gas Networks 47 Telecoms Networks 48 Energy-Related Services 48 Contracting, Connections and Metering 51 Energy and Home Services 52 Gas Storage 53 Managing Risk

55 Corporate Governance Report 62 Directors’ Report 64 Directors’ Biographies and Responsibilities 66 Remuneration Report 67 Remuneration Report – At a Glance 68 Remuneration Report – Remuneration Explained 68 The Role of the Remuneration Committee 68 Total Remuneration Policy 72 Service Contracts 72 Non-Executive Directors 73 Remuneration Report – Remuneration in Detail

76 Independent Auditor’s Report 95 6. Directors and Employees 114 19. Trade and Other Payables 77 Consolidated Income Statement 96 7. Finance Income and Costs 114 20. Current Tax Liabilities 78 Balance Sheets 97 8. Taxation 114 21. Construction Contracts 79 Statements of Recognised 99 9. Dividends 114 22. Loans and Other Borrowings Income and Expense 99 10. Earnings Per Share 118 23. Deferred Taxation 80 Cash Flow Statements 100 11. Intangible Assets 119 24. Provisions 82 Notes on the Financial Statements 104 12. Property, Plant and Equipment 119 25. Share Capital 82 1. Significant Accounting Policies 105 13. Investments 120 26. Reserves 90 2. Change in Accounting Policy 108 14. Subsidiary Undertakings 121 27. Retirement Benefit Obligations 91 3. Segmental Information 110 15. Acquisitions and Disposals 125 28. Employee Share-based Payments 93 4. Other Operating Income and Expense 113 16. Inventories 128 29. Financial Instruments and Risk 94 5. Exceptional Items and Certain 113 17. Trade and Other Receivables 140 30. Related Party Transactions Re-measurements 113 18. Cash and Cash Equivalents 141 31. Commitments and Contingencies

143 Shareholder Information

Scottish and Southern Energy 01 Annual Report 2009 Chairman’s Introduction

At a time of financial, economic and energy market turmoil, a company’s OVERVIEW ability to deliver profit and dividend growth in a responsible way has never been more important.

In 2008/09, SSE delivered a 2.0% increase near Loch Ness, being a particularly Report in adjusted profit before tax* and is significant accomplishment. This should be This Annual Report describes in detail SSE’s recommending a 9.1% increase in the followed during 2009/10 by the completion financial and operational performance full-year dividend per share payable to of Marchwood, which will be one of the in 2008/09 and priorities for 2009/10 and shareholders. This means that since it was most efficient gas-fired power stations beyond. It also sets out SSE’s approach formed, SSE has achieved 10 successive in the UK. Major infrastructure projects to the vital issues of risk management, years of increasing profits and dividend. always present challenges, but I am corporate governance and remuneration – confident that SSE’s growing capability all in the context of its strategy, purpose and No Frills in this area will stand the company in values. SSE believes it is not an exercise 2008/09 was a tough year, dominated in good stead in the years to come. in box-ticking, but a balanced portrayal the first half by very high wholesale prices of the business. I would be very happy for electricity and gas. Throughout, SSE Purpose to hear from any shareholder who has managed its business in its usual no-frills In total, SSE is planning to invest around suggestions for improving the Annual way. That means delivering sector-leading £6.7bn in the five years between 2008 Report in 2010. service to energy supply and electricity and 2013. This investment is geared to distribution customers, dealing with the fulfilling SSE’s core purpose, which is Future difficult operational issues that arise to provide the energy people need in a Many changes are likely to take place at power stations from time to time and reliable and sustainable way. SSE has in energy production, distribution and undertaking a significant programme of two types of customer – those to whom consumption in the next decade. With investment in energy assets of crucial it supplies energy and related services such a strong team in place throughout importance in the UK and Ireland. within competitive markets and those SSE, however, I am very confident about to whom it delivers energy through the future. The organisation is built for the Strategy economically-regulated regional networks long term, and has the strategy, purpose, In the current environment, SSE’s strategy – and its commitment to delivering best- values and people to deliver sustained – operating and investing in a balanced in-sector service applies across the board. success in the coming years.// range of regulated and non-regulated energy businesses – is straightforward Values Lord Smith of Kelvin Chairman and has obvious benefits. It supports Service is part of the ‘SSE SET’ of SSE’s fundamental commitment to core values – Safety, Service, Efficiency, maintaining annual real dividend growth, Sustainability, Excellence and Teamwork. with the next step being the increase of Applying them has resulted in SSE at least 4% more than inflation targeted doubling the regulated asset value of its for 2009/10. networks, the capacity of its generation portfolio, the number of energy supply Investment customers and the dividend per share Dividend growth is supported by in seven years. They will continue to be investment. Securing future supplies the mainstay of the company. and tackling climate change are now the twin goals of energy policy in the UK, People Ireland and throughout the European The SSE team – now numbering more Union, and our programme of investment than 18,500 people – works together in continues to reflect this. As a result, our an outstanding way and it is a privilege portfolio of assets is growing, with the for the non-Executive Directors, including completion during 2008/09 of the large- our new colleague Thomas Andersen, scale hydro electric scheme at Glendoe, and me to be associated with them. Scottish and Southern Energy 02 Annual Report 2009 Overview of our Business

Scottish and Southern Energy is involved in the generation of electricity; the supply of electricity and gas; electricity, gas and telecoms networks; and other energy-related services such as gas storage, contracting, connections and metering.

Generation Supply

Sustainability, Diversity, Optionality Affordability, Products, Service SSE owns around 10,700MW of electricity SSE supplies electricity and gas to over nine generation capacity in the UK and Ireland, million domestic, commercial and industrial comprising around: 4,500MW of gas- and customers within Great Britain’s competitive oil-fi red capacity; 4,000MW of coal-fi red market and to around 50,000 customers in the capacity (with biomass co-firing capability) and Irish all-island market. It is the second largest 2,200MW of hydro, wind and dedicated biomass supplier of energy in Great Britain and supplies capacity, making it the UK’s largest generator energy under the Southern Electric, SWALEC, of electricity from renewable sources and Scottish Hydro Electric, Atlantic Electric and giving it the most diverse mix of fuels. Gas and (in Ireland) Airtricity brands.

10.7 GW 41.2 TWh £4.3bn 9m 1st 191k Capacity Output 08/09 Investment 08-13 Customers Service ranking Homes insulated

Capacity – Composition Supply Brands Gas/Oil 42% (4.5GW) Coal/Biomass 37% (4.0GW) Renewable 21% (2.2GW)

Key Priorities Key Priorities k Complying with safety and environmental requirements k Providing value for customers’ money through fair pricing k Maintaining availability of power stations to generate k Delivering best-in-sector service k Investment in refurbishment of existing assets k Developing existing and new energy products k Delivering new plant for generating electricity k Completing energy effi ciency programmes Scottish and Southern Energy 03 Annual Report 2009 OVERVIEW

Networks Energy-Related Services

Reliability, Safety, Effi ciency Dependability, Security, Innovation SSE distributes electricity to over 3.5 million SSE provides energy and utility-related services. properties in northern Scotland and central It owns and operates the UK’s largest onshore southern England via overhead lines and gas storage facility and is developing a second underground cables. It also owns 50% of Scotia such facility. Its Contracting group operates Gas Networks, which owns and operates the from almost 60 regional offi ces throughout Scotland and Southern gas distribution networks. Great Britain. SSE Utility Solutions provides a All these networks are subject to incentive- ‘one-stop’ approach for customers in the land based regulation by Ofgem. After electricity and development and construction sectors. SSE gas, telecoms is SSE’s third network business. Home Services has over 330,000 customers.

£4.7bn 127 k 74k 30 325mcm 47 RAV Power network (km) Gas network (km) Lighting contracts Gas storage capacity Networks

Regulated Asset Value of Energy Networks (£bn*) Energy-Related Services 2009 4.7 2008 4.5 2007 4.2 2006 4.1 2005 2.5

* Includes 50% of SGN

Key Priorities Key Priorities k Maintaining safe and reliable supplies of power and gas k Development of additional gas storage capacity k Effi cient delivery of investment in networks k High service standards to maximise ‘repeat’ contracting business k Upgrade work on Beauly-Denny transmission line k Building up ‘one stop’ approach to utility provision k Complete electricity distribution price control review with Ofgem k Continued expansion of Home Services Scottish and Southern Energy 04 Annual Report 2009 Overview of our Business (continued)

Scottish and Southern Energy is governed by a number of key financial principles including: well-founded investments; maintenance of a strong balance sheet; and sustained real dividend growth.

Investment Financing

Diversity, Optionality, Risk Management Strength, Flexibility, Opportunism SSE has plans to invest around £6.7bn SSE retains one of the strongest balance (excluding SGN) between 2008 and 2013. sheets in the global utility sector (rated ‘A’ The principal focus of the investment by Standard & Poor’s and ‘A2’ by Moody’s). (around £3bn) is renewable energy, but It maintains a flexible approach to fi nancing investment is also planned in thermal investment. Since July 2008 it has secured generation, electricity networks and in other funding and facilities totalling almost £4bn, areas such as gas storage. The result of this including gross proceeds of £479m from the will be a signifi cantly enhanced asset base placing of 42 million shares (approximately and additional cash fl ows. 4.8% of its share capital).

* * £1.28bn c£1.50bn c£3.9bn £479m £500m £700m Capex 08/09 Capex 09/10 Capex 2010-2013 Placing proceeds 20-year bond Five-year bond

* Forecast

Shape of investment 08-13 Capital expenditure Renewable 46% 2009 1,279.8 Thermal Generation 18% 2008 810.3 Electricity Networks 27% 2007 663.4 Other 9% 2006 502.1 2005 383.5

Key Priorities Key Priorities k Maintaining a balanced approach to investment k Maintain a strong balance sheet k Beat cost of capital and exceed appropriate hurdle rates k Operate with a sound debt structure k Effective management of specific projects k Continuity of funding and flexibility k Marchwood, Clyde, Greater Gabbard, Beauly-Denny, Aldbrough k Focus on strong cash flows Scottish and Southern Energy 05 Annual Report 2009 OVERVIEW

Risk Outlook

Strategy, Balance, Limited Value at Risk Sustainability, Security, Growth SSE’s principal risk management approach SSE’s fi rst responsibility to shareholders is is its fundamental strategy: operating and to deliver sustained, year-on-year increases investing in a balanced range of regulated in the dividend payable to shareholders. Its and non-regulated energy-related and utility recommended full-year dividend for 2008/09 businesses. This limits the extent of any single is 66p per share and its target for 2009/10 is risk and the value associated with it. The need at least 4% annual real growth, with sustained to limit value at risk is at the heart of SSE’s real growth thereafter. SSE is one of just 11 decision-making process and the approach FTSE 100 companies to have delivered above to acquisitions is also disciplined. infl ation dividend growth every year since 1998.

38% 54% 8% 66.0p 10.7% 4% Regulated Generation and Supply Other FY dividend 08/09 Compound Annual Target dividend Growth Rate 2002-2009 growth (real) 09/10

Sources of operating profi t 08/09* Dividend (pence per share) Regulated 38% 66.0 60.5 Generation and Supply 54% 55.0

Other 8% 46.5 42.5 37.7 35.0 32.4 30.0 27.5 25.7

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Key Priorities Key Priorities k Maintaining balanced business model k Maintain record of year-on-year growth k Investment in various sources of profitability k Invest to support cash flows k Continually developing options for the future k Set out new dividend policy in 2010 k Managing strong systems of internal control k Long-term target to double dividend again Scottish and Southern Energy 06 Annual Report 2009 Our Strategy

Scottish and Southern Energy’s strategy is to deliver sustained gas distribution. Its other principal activities – electricity generation, real growth in the dividend through the efficient operation of, and energy supply and other energy-related services – are not the investment in, a balanced range of regulated and non-regulated subject of economic regulation. energy-related businesses. During 2008/09, 38% of SSE’s operating profit was derived SSE is involved in three separate activities which are the subject from its economically-regulated activities and 62% was derived of economic regulation – electricity transmission, electricity from the non-regulated activities. SSE has, therefore, a broad distribution and (through its 50% stake in Scotia Gas Networks) platform from which to deliver sustained real dividend growth.

Operating Regulated Businesses SSE is responsible for delivering electricity to around 3.5 million properties in a reliable way, and the regulator Ofgem provides incentives for delivering a good quality of supply to customers.

2008/09 Progress 2008/09 Measurement 2009/10 Priorities

What we achieved in 2008/09 against How we measure progress against What we are focused on in 2009/10 these priorities each strategic priority k Average number of minutes customers Customer Minutes Lost k Keep number of power cuts were without supply in Southern Electric to minimum. Power Distribution region was 66. 67 66 k Keep duration of power cuts k Average number of power supply to minimum. interruptions per 100 customers k Deliver best-in-sector telephone was 64. service to customers. k Average number of minutes k Identify innovative ways to operate customers were without supply networks. in Scottish Hydro Electric Power Distribution region was 75. k Average number of power supply 2008 2009 interruptions per 100 customers was 76. Customer Minutes Lost in Southern Electric Power Distribution region

Investing in Regulated Businesses Investment in electricity and gas networks is regulated by Ofgem. This investment increases their Regulated Asset Value (RAV) which helps determine the revenue companies can earn under their Price Controls.

2008/09 Progress 2008/09 Measurement 2009/10 Priorities

What we achieved in 2008/09 against How we measure progress against What we are focused on in 2009/10 these priorities each strategic priority k Total investment of £314.6m Regulated Asset Value k Deliver efficient capital expenditure in electricity networks. in electricity distribution. 4.7 k RAV of electricity networks grew 4.5 k Secure good outcome from to £2.9bn. Distribution Price Control Review k Share of SGN capex/repex – £191.4m. 2010-15. k Share of RAV of SGN’s gas networks k Secure consent to upgrade grew to £1.8bn. Beauly-Denny transmission line. k Support capital and replacement expenditure in SGN. £bn 2008 2009 The Regulated Asset Value of SSE’s electricity and gas network assets (equity share) Scottish and Southern Energy 07 Annual Report 2009

Scottish and Southern Energy’s strategy is to deliver

sustained real growth in the dividend through the efficient OVERVIEW operation of, and investment in, a balanced range of regulated and non-regulated energy-related businesses.

Operating Non-Regulated Businesses SSE supplies energy to industrial, commercial and domestic customers in the markets in Great Britain and Ireland and is also involved in electrical and utility contracting, connections, metering, home and energy services, and gas storage.

2008/09 Progress 2008/09 Measurement 2009/10 Priorities

What we achieved in 2008/09 against How we measure progress against What we are focused on in 2009/10 these priorities each strategic priority k Total number of energy supply Energy Supply Customers k Add to number of energy supply customers in GB up 600,000 to customers. 9.05 k 9.05 million. 8.45 Increase the number of customers k Total number of energy supply with better plan. customers in all-island market k Maintain best-in-sector position in Ireland up 25% to 50,000. in customer service. k Top-ranked energy supplier in four k Deliver energy efficiency programmes. independent analyses of customer service in GB. k New better plan energy efficiency Million product attracted 125,000 new 2008 2009 accounts, taking total to 165,000.

Investing in Non-Regulated Businesses SSE invests in maintaining existing, and developing new, electricity generation and gas storage assets, influenced by the low carbon and security of supply policy goals adopted by the EU.

2008/09 Progress 2008/09 Measurement 2009/10 Priorities

What we achieved in 2008/09 against How we measure progress against What we are focused on in 2009/10 these priorities each strategic priority k Total investment of £741.8m in Investment in Renewable Energy k Increase renewable energy capacity maintaining and developing new in operation. electricity generation assets. 525.6 k Start construction work at Clyde k New 100MW Glendoe hydro electric wind farm. scheme and 90MW of new wind farm k Start offshore construction work capacity completed. at Greater Gabbard. k Work under way on Greater Gabbard, k Deliver additional gas storage the biggest offshore wind farm under capacity at Aldbrough. construction in the world. 132.8 k First import/export of gas at £m new Aldbrough storage facility. 2008 2009 Scottish and Southern Energy 08 Annual Report 2009 Chief Executive’s Statement

Purpose and Strategy SSE’s core purpose is to provide the energy people need in a reliable and Dividend – sustainable way. In line with this, its strategy has been and will continue to be the delivery of sustained real growth in the dividend payable to shareholders 9.1% higher through the efficient operation of, and investment in, a balanced range of regulated and non-regulated energy- related businesses. than last year Within this strategic framework, SSE will continue to focus on enhancing and creating value for shareholders from its energy-related activities in the UK and Ireland and, over time, from the SSE’s first responsibility to development of a European renewable shareholders is to deliver sustained energy business. Financial Principles real growth in the dividend. At 66.0p, Implementation of the strategy will the recommended full-year dividend is continue to be founded on SSE’s well- established financial principles. These 9.1% higher than in the previous year. principles are the:

k effective management of core businesses; k maintenance of a strong balance sheet; k rigorous analysis to ensure investments are well-founded and, where appropriate, innovative; k deployment of a selective and disciplined approach to acquisitions; k use of purchase in the market of the company’s own shares as the benchmark against which financial decisions are taken; and, most fundamentally of all, k delivery of sustained real dividend growth.

Delivery Against Purpose, Strategy and Principles SSE has six core values – The Board is recommending a final the ‘SSE SET’ – against which dividend of 46.2p per share, making it has key performance indicators. a full-year dividend of 66.0p, an increase of 9.1% on the previous year. The full- year dividend payment for 2008/09 is Safety Service Efficiency Sustainability Excellence Teamwork covered 1.57 times by SSE’s adjusted profit after tax and is more than double We believe all accidents are preventable, so we aim the dividend per share paid seven years to do everything safely and responsibly, or not at all. ago, in 2001/02. This means we believe all of our work can and should be carried out without any harm to employees, Through investment and acquisition, contractors, customers or any other people. the Regulated Asset Value (RAV) of SSE’s energy networks businesses has doubled in six years, to £4.7bn (including SGN), and Lost-time and Reportable Injury Rate the capacity of SSE’s power stations has per 100,000 Hours Worked doubled in seven years, to 10.7 gigawatts 2009 0.07 (GW). As a result of effective management 0.07 of core businesses, the number of 2008 0.04 customer accounts to which SSE supplies 2007 0.05 energy has also doubled in seven years, to over nine million. This, allied to SSE’s Scottish and Southern Energy 09 Annual Report 2009

expansion in contracting, connections, Outlook for 2009/10 and Beyond metering, gas storage and other The economic outlook for 2009/10 remains businesses makes SSE the biggest and uncertain and the timing, speed and extent broadest-based energy company in the UK. of any recovery are all open to question. OVERVIEW Against this background, SSE offers three Future Environment key advantages. In October 2008, the UK Industry Task Force on Peak Oil, of which SSE is a First, its core purpose is to provide energy – member, published a report, The Oil something which people need, rather than Crunch, which stated that a peak in want. Second, its strategy of maintaining cheap, easily available oil production a balanced range of regulated and non- is likely to be reached as early as 2013. regulated energy-related businesses It said that the key to all three threats reduces the risk associated with any facing the UK, Ireland and other countries particular business activity and provides – energy security, climate change and a broad platform from which to maintain peak oil – is ‘immediate and rapid sustained real dividend growth. Third, acceleration in our use of non-fossil that over-riding financial goal – sustained sources of energy, and reduction in the real dividend growth – is reasonable overall demand for energy’. and straightforward.

The requirement for such an immediate Against this background, SSE’s priorities and rapid acceleration in the use of non- during 2009/10 are to: fossil sources of energy has been put on a statutory footing in the European Union, k work in a safe and responsible manner; with the adoption of the Renewable k achieve excellence in all aspects of Energy Directive, and in the UK, with customer service, including energy the passing of the Climate Change Act. networks; This means it is no longer sustainable – k increase the number of customers in any sense – for energy companies to in energy supply and home services; develop their business on the basis of k ensure power stations maintain a high ever-increasing consumption; indeed, level of availability to generate electricity; the reverse is the case. k deliver efficient investment throughout its activities, especially in the major Implications for SSE projects in generation, electricity SSE believes that the energy price networks and gas storage; and Thoughts on… volatility which the world experienced k sustain through the economic In the following pages Chief Executive during 2008 was a foretaste of what is downturn its other businesses Ian Marchant gives his perspective on likely to happen as the supply of finite such as contracting, connections key issues which SSE is dealing with resources like oil and gas begins to and telecoms.// as it works to fulfil its core purpose struggle to keep pace with the demand. of providing the energy people need While the economic slowdown is likely Ian Marchant Chief Executive in a reliable and sustainable way. to postpone for a time the full impact of this being felt in the UK and elsewhere, it will not prevent it. Dividend – pence per share For SSE, this means: k producing electricity in a more 66.0 sustainable way with new developments in generation that 60.5 make better use of the world’s natural resources; 55.0 k helping make electricity and gas more affordable by offering ways to enable and encourage customers to take 46.5 control of, and be more efficient in, their use of energy; 42.5 k ensuring the distribution of energy remains reliable, as sources and use 37.7 of electricity and gas change, through 35.0 investment in networks; and 32.4 k 30.0 providing more gas storage capacity 27.5 for the UK to maintain dependable 25.7 supplies of energy as the peak of easily available oil and gas production 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 approaches. Scottish and Southern Energy 10 Annual Report 2009 Thoughts on… Generation

Sustainability

Affordability Glendoe Hydro Electric Scheme In December 2008 I went on a roadshow around SSE’s major sites to mark the Reliability 10th anniversary of the company’s formation. The highlight was an early morning visit to Glendoe to see the end of its first 24-hour run at its full load of 100MW. Dependability This was my fifth visit to the project, starting with the ground-breaking back in 2006. Although Glendoe is a small part of our overall £6.7bn investment programme, it has always been my personal favourite as it demonstrates a successful blend of our heritage and engineering skills with our drive to improve the sustainability of our generation business.

As the evidence on climate change becomes clearer, we are going to have to change both how we use energy and how we produce it. Glendoe is a key part of our commitment in this vital area, and having successfully completed it I expect us to follow it with more investments in renewable energy in the future.

Scottish and Southern Energy 12 Annual Report 2009 Thoughts on… Supply

Sustainability

Affordability Insulation Last year proved to be one of the most difficult I have known as we saw the Reliability combination of enormous fuel price volatility and the onset of difficult economic times. It was really disappointing to have to increase prices in the summer, Dependability but I was pleased we could announce some reduction in February. I know that high energy bills cause problems for our customers and for this reason we were happy to step up our efforts in energy efficiency and during last year we supported insulation in over 190,000 homes – as well as providing around 16 million low energy light bulbs.

When I meet politicians and regulators, I always say that our job as an energy supplier is to help people use less energy. That’s why we’ve been heavily involved in trials of ‘smart’ meters, which give customers real-time information about the energy they’re consuming. It’s vital they’re installed in houses up and down the country as soon as possible.

Scottish and Southern Energy 14 Annual Report 2009 Thoughts on… Networks

Sustainability

Affordability Line Patrol Providing reliable supplies of power and gas is essential to the communities Reliability we serve. We distribute energy in some of the most remote and isolated parts of the country and in some of the most densely-populated.

Dependability The challenge is the same: to make our energy networks as resilient as possible and respond as quickly as possible when they fail. As I meet our teams involved in the work, I am always impressed by their dedication and commitment – often in atrocious weather conditions.

As a driver, I know what it’s like having to negotiate roadworks on my way to work. We don’t like digging up the roads and are always looking at ways of repairing or replacing our cables and pipes that minimise disruption. We’re trialling a number of techniques which reduce the impact of our activities and improve the usage of our assets. It has been good to see new thinking being brought to what many regard as a traditional industry.

Scottish and Southern Energy 16 Annual Report 2009 Thoughts on… Energy-Related Services

Sustainability

Affordability Aldbrough ‘Energy security’ is one of those phrases that can mean a lot of different Reliability things – partly because it has so many different facets. For example, we are Dependability increasingly dependent in the UK on energy imports as our own reserves decline. How we address this in the context of a global economy is something we have looked at over the last year. We don’t pretend to have all the answers, but one thing is clear to us: we will need more gas storage facilities. We already own the largest onshore facility at Hornsea and are building the UK’s newest storage at Aldbrough on the east coast.

We now have the opportunity to extend Aldbrough, making another contribution to the energy needs of the UK. There are huge challenges to be faced if the UK is to maintain secure energy supplies and meet renewable energy targets. The more successful and profitable SSE is, the better-placed we will be to help meet those challenges in the future.

Scottish and Southern Energy 18 Annual Report 2009 Financial Overview

Financial Results for 2008/09 These results for the year to 31 March 2009 are reported under International Adjusted profit Financial Reporting Standards, as adopted by the EU. SSE’s focus has consistently been on profit before tax before exceptional items, the impact of before tax* grew International Accounting Standards IAS 32 and IAS 39, and after the removal of taxation on profits from jointly controlled entities and associates (adjusted profit before tax*). The table opposite reconciles by 2.0% SSE’s reported profit before tax and its adjusted profit before tax*.

Like all major energy suppliers, SSE has to enter into forward commodity contracts (principally coal, oil, gas, carbon and wholesale electricity) to ensure the future requirements of customers are met. Some of these contracts are deemed to be derivative financial instruments and so must be fair-valued under IAS 39. This means that the prevailing forward market price at 31 March 2009 is applied to these contracts. SSE sets out these fair-value adjustments separately, as re-measurements, because they are unrealised and non-cash.

The statutory results include charges to operating profit relating to these fair- value adjustments of £1,263.2m, which compares with £164.1m in the previous year. This mainly represents unrealised SSE’s adjusted profit before tax* grew mark-to-market losses created by commodity contracts, most of which by 2.0%, to £1,253.7m. This is SSE’s were entered into in the first half of the financial year and which were priced tenth successive increase since it above the wholesale market value of was formed in 1998. commodities as at the financial year-end. The extent of the actual profit or loss arising over the life of these contracts – many of which were entered into to provide fixed price energy to industrial and commercial customers – will not be determined until they unwind; for over 60% of the total energy volume, this will be in 2009/10. Safety Service Efficiency Sustainability Excellence Teamwork Adjusted Profit Before Tax* in 2008/09 Adjusted profit before tax* rose by 2.0%, We give our customers service that we are proud of and from £1,229.2m to £1,253.7m. This is make commitments that we deliver. This means making modest growth, consistent with the commitments that are of value to customers and that they objective which SSE stated at its Annual can trust – in the knowledge that they are being served General Meeting in July 2008. by people who genuinely care. In November 2008, SSE highlighted three particular issues that had influenced uSwitch.com Customer profitability in the first six months of the Service Ranking financial year – although none of these 2009 1st issues can be viewed in isolation and 1st need to be considered in the context of 2008 1st the conditions in the wholesale energy 2007 1st markets prevailing at the time. In the second half of the financial year: Scottish and Southern Energy 19 Annual Report 2009

March 09 March 08 year, an increase of 9%. This will make £m £m a full-year dividend of 66.0p, which is: Reported profit before tax 53.3 1,083.8 Movement on derivatives (IAS 39) 1,263.2 164.1 k an increase of 9.1% compared with OVERVIEW Exceptional items (102.7) (65.2) 2007/08; Tax on JVs and Associates 39.3 41.9 k a real-terms increase of 9.5%, based Interest on convertible debt 0.6 4.6 on the average rate of inflation in the UK between April 2008 and Adjusted profit before tax* 1,253.7 1,229.2 March 2009; Adjusted current tax charge (300.4) (317.2) k more than double the dividend paid Adjusted profit after tax* 953.3 912.0 in 2001/02, since when there has been compound annual growth of 10.7%; Reported profit after tax 112.3 873.2 and Number of shares for basic and k covered 1.57 times by SSE’s adjusted adjusted EPS (million) 883.0 863.2 profit after tax, compared with 1.73 Adjusted EPS* 108.0 105.6 times in 2007/08. Basic EPS 12.7 101.1 The first full-year dividend was paid by SSE in 1999, so the recommended full- year dividend increase of 9.1% represents k The progress made in installing flue suggest they will not be at the high levels the tenth successive above-inflation gas desulphurisation (FGD) equipment seen in previous years. In addition, there dividend increase since then. SSE is one at Fiddler’s Ferry and Ferrybridge is clear evidence of a likely lowering in of just 11 FTSE 100 companies to have power stations meant SSE was able demand for energy. Nevertheless, SSE delivered better-than-inflation dividend to operate all of the affected plant at is aiming to deliver a moderate increase growth every year during this period, and the stations without any restrictions in profit before tax in 2009/10. ranks fifth amongst that group in terms on either running hours or electricity of compound annual growth rate over output from January 2009 and Actual adjusted profit before tax will, in that time. February 2009 respectively. practice and as always, be determined by k The significant imbalance between issues such as: the availability of SSE’s Future Dividend the cost of energy procured and the gas- and coal-fired power stations to According to a study by Standard & Poor’s cost of energy supplied in the first generate electricity; the output of Equity Research, dividend payments half of the year was addressed to the renewable energy from SSE’s hydro by FTSE 100 companies were reduced extent that SSE was able to announce electric stations and wind farms; the by 40% in 2008, and this has continued a reduction in electricity and gas impact of the weather on energy in 2009. Against this background, SSE prices for domestic customers production and consumption and the remains acutely aware of its first in February 2009. actual level of consumption; and the responsibility to shareholders: to deliver k The major unplanned outage at interaction between wholesale prices sustained real growth in the dividend. Medway power station was covered for energy and the prices for electricity Its target for 2009/10 as a whole is to by business interruption insurance and gas charged to customers. grow the dividend by at least 4% more from the middle of November 2008, than inflation (based on the average rate and is now close to an end. Adjusted Earnings Per Share* of inflation in the UK between April 2009 To monitor financial performance over and March 2010). Adjusted profit before tax* during the medium term, SSE continues to 2008/09 also reflects the requirement focus on adjusted earnings per share* Since 2005, SSE’s target for dividends to make a provision of £9.6m in respect of because it has the straightforward virtue after 2010 has been ‘sustained real a reorganisation of SSE’s Home Services of defining the amount of profit after tax growth’, and that remains the case. It businesses, including appliance retailing. that has been earned for each ordinary will set out more defined dividend targets share and so reflects a clear view of by its preliminary results statement in Exceptional Items underlying financial performance. In May 2010. There was one exceptional item during 2008/09, SSE’s adjusted earnings per 2008/09: the profit of £102.7m secured share were 108.0p, compared with 105.6p The first full-year dividend paid by SSE on the disposal in November 2008 of 50% in the previous year. was 25.7p per share, in 1999. By 2007, of the equity in Greater Gabbard Offshore the dividend was more than twice the Winds Limited (SSE retained the other 50%). original level. The next milestone will be to deliver a dividend that is three times Adjusted Profit Before Tax* for 2009/10 Dividend SSE’s first payment. That milestone is on SSE’s emphasis is on adjusted profit the road to SSE’s long-term target, which before tax* on a full-year, as opposed to is to double the dividend again, from the half-year, basis and since it was formed 2007 level. in 1998 it has delivered 10 successive Final Dividend increases in profit before tax. SSE’s first responsibility to shareholders SSE’s strategy is explicitly designed to is to deliver sustained real growth in the deliver sustained real dividend growth The general economic environment is dividend. The Board is recommending and its operational and investment likely to be challenging during 2009/10. a final dividend of 46.2p per share, decisions are all taken to support Forecasts for wholesale electricity prices compared with 42.4p in the previous its achievement./­ Scottish and Southern Energy 20 Annual Report 2009 Financial Overview (continued)

Investment and Investment and Capital Expenditure Key Performance Indicators Capital Expenditure March 09 March 08 £m £m Thermal Generation investment 216.2 246.2 Renewable Generation investment 525.6 132.8 Power Systems investment 314.6 264.4 Introduction Gas Storage investment 55.4 40.9 In March 2008, SSE set out plans to Other 168.0 126.0 invest around £6.7bn (excluding SGN) in the five years to March 2013 – one of the Total investment and capital expenditure 1,279.8 810.3 biggest capital investment programmes SSE share of SGN capital/replacement currently being undertaken in the UK expenditure 191.4 189.5 by a FTSE 100 company.

The principal focus of the investment programme is renewable energy, the work at Glendoe, and work at a number expenditure of around £2.8bn, which is just requirement for which is underpinned of wind farm developments. The total over two-fifths of the £6.7bn envisaged for by statute at EU and Member State level. includes 50% (£210.5m) of the investment the five years to March 2013. Significant At the same time, significant investment at Greater Gabbard during 2008/09. parts of its investment programme are is also taking place in thermal generation, discretionary in nature; others, such as the electricity networks and in a number of Capital expenditure in Power Systems was Griffin wind farm, have been included in other areas, such as gas storage. It will £314.6m, compared with £264.4m in the the programme following an acquisition support the maintenance and development previous year, in line with the investment because they offer the prospect of a higher of assets which are of strategic significance focus described under ‘Electricity Network return on investment than other projects, in the context of energy policy in the UK, Investment’ (see below). The largest project which have been displaced. Ireland and elsewhere in the EU and will in the programme is the £16m installation result in SSE benefiting from a significantly of the two new 132kV underground cables Inevitably, therefore, the £6.7bn programme enhanced asset base and additional cash between Bramley and Basingstoke, where is constantly monitored and kept under flows, which will support future dividend the on-load commissioning has been review, to make sure that SSE is taking growth. All of this investment is, therefore, successfully completed. advantage of the best opportunities to well-founded in accordance with SSE’s invest and to make sure that the best financial principles. A total of £39.7m was invested in the new projects are prioritised – and all at the gas storage facility at Aldbrough during optimum time. The risks involved in any Investment in 2008/09 the period. SSE has so far invested individual investment decision – market, 2008/09 represented the first year of £181.3m at Aldbrough. technology and construction – are also very SSE’s five-year investment programme, carefully considered. These decisions are and capital and investment expenditure Other investment and capital expenditure taken in a way which is consistent with (excluding SGN) totalled £1,279.8m, includes the acquisition in December SSE’s financial principles, targeting returns compared with £810.3m in the previous year. 2008 of the customer service centre in which are greater than the cost of capital, Separately, SSE’s share of SGN’s capital Cumbernauld from Barclaycard and the enhance earnings and contribute to and replacement expenditure was £191.4m, development of SSE’s new operations centre dividend growth. compared with £189.5m in the previous year. near Havant on the south coast of England, which will replace and upgrade a number of In the five years to 31 March 2009, SSE’s existing facilities and buildings in that area. capital and investment expenditure totalled Financial Management more than £3.6bn, compared with just over Just over £800m has been invested £1.6bn in the five years to 31 March 2004. by SSE in assets which were still under and Balance Sheet During the 2004-09 period, SSE has built construction at 31 March 2009 but which up a significant amount of experience and have yet to contribute earnings, including capability in the delivery of major projects. its shares of Greater Gabbard offshore Inevitably, such experience and capability wind farm and Marchwood power station. Treasury Policy reflects both the problems that have had SSE’s operations are generally financed to be dealt with and the successes that Future Investment Priorities by a combination of retained profits, have been achieved. in 2009/10 and Beyond bank borrowings, bond issuance and SSE expects its capital and investment commercial paper. As a matter of policy, During 2008/09, there was total investment expenditure will reach around £1.5bn a minimum of 50% of SSE’s debt is subject of £741.8m in Generation, compared with during 2009/10 as significant projects to fixed or inflation-linked rates of interest. £379.0m in the previous year. such as the Clyde, Griffin and Greater Within this policy framework, SSE borrows Gabbard wind farms, the Aldbrough gas as required on different interest bases, with The investment of £216.2m in thermal storage facility and, subject to Ministers’ derivatives and forward rate agreements generation includes SSE’s 50% share views, the Beauly-Denny replacement being used to achieve the desired out-turn of the Marchwood development and the transmission line make progress. interest rate profile. At 31 March 2009, installation of FGD equipment at Fiddler’s after taking account of interest rate swaps, Ferry and Ferrybridge. The investment in In the two years to 31 March 2010, SSE will 84.8% of SSE’s borrowings were at fixed renewable generation includes construction have undertaken capital and investment or inflation-linked rates. Scottish and Southern Energy 21 Annual Report 2009

Borrowings are made in both sterling and k the delay in Fiddler’s Ferry and Its current corporate credit ratings are euro to reflect the underlying currency Ferrybridge power stations returning ‘A’ (Standard & Poor’s) and ‘A2’ (Moody’s). denomination of assets and cashflows to unrestricted operations resulted within SSE. All other foreign currency in higher than normal stocks of coal In 2007/08 one utilities analyst team, OVERVIEW borrowings are swapped back into sterling. and biomass being in place at the writing about SSE, said that ‘it is a feature end of the financial year; and of today’s markets that investors view lack The United Kingdom remains SSE’s main k the conversion of €1.092bn of euro­ of suitable leverage as one of the worst area of operation, although business denominated debt into sterling for “crimes” that a management can commit’. activities in overseas markets – most accounting purposes, after a period in Events in the financial markets during notably the Republic of Ireland – have which the value of the euro appreciated 2008/09 fully exposed the shortcomings grown during the year. Transactional significantly versus sterling, increased of that view, and reinforced the paramount foreign exchange risk arises in respect of the sterling equivalent value of (but importance of avoiding inappropriately procurement contracts, fuel and carbon not actual) debt. large levels of debt and of maintaining purchasing, commodity hedging and a strong financial profile. energy trading operations, and long-term The adjusted net debt number of service agreements for plant. SSE’s policy £4.822bn, would result in a Net Debt/ SSE’s balance sheet position means it is is to hedge all material transactional EBITDA ratio of around 2.9 on 31 March comparatively well-placed to raise finance foreign exchange exposures through the 2009 (excluding SGN). and in a position to pay interest at lower use of forward currency purchases and/or rates than could otherwise be the case. derivative instruments. Indirect foreign Borrowings and Facilities This is demonstrated by its success in exchange exposures created by SSE’s gas The objective for SSE is to maintain a securing new funding of almost £4bn purchasing are similarly hedged on an balance between continuity of funding and since July 2008, despite the very difficult ongoing basis. flexibility, with debt maturities staggered market conditions experienced by all across a broad range of dates. Its average borrowers. This included: Translational foreign exchange risk arises age of debt as at 31 March 2009 was in respect of overseas investments, and 11.8 years, compared with 9.6 years k a €600m five-year euro bond with hedging in respect of such exposures as at 30 September 2008 and 8.6 years a coupon of 6.125%; is determined as appropriate to the at 31 March 2008. k a £350m 30-year sterling bond with circumstances on a case-by-case basis. a coupon of 6.25%; SSE’s debt structure remains strong, with k a JPY28bn (equivalent to £208m) Net Debt and Cash Flow around £4.4bn of its net debt at 31 March five-year loan with an effective interest On an unadjusted basis, SSE’s net debt 2009 in medium-to-long term borrowings rate of around 6%; was £5.100bn at 31 March 2009. There in the form of issued bonds, European k a £500m 20-year sterling bond with were, however, outstanding liquid funds Investment Bank debt and long-term project a coupon of 8.375%; of £277.8m relating to power purchase finance and other loans. Within this, less k a £700m five-year sterling bond with agreements and wholesale energy than £150m of SSE’s medium- to long-term a coupon of 5.75%; transactions, the majority of which borrowings will mature during 2009/10. k a £100m 35-year index-linked loan was reconciled and settled in April 2009. with a coupon of 4.454%; SSE believes, therefore, that it is more The balance of SSE’s net debt has been k bank facilities of over £1.1bn; and meaningful to adjust its net debt financed with short-term commercial k gross proceeds of £479m achieved from accordingly, giving a total for 31 March 2009 paper and bank debt. A total of 19.5% the placing of shares, representing of £4.822bn. This adjusted total compares of SSE’s long-, medium- and short-term approximately 4.8% of SSE’s share directly with £4.646bn at 30 September borrowings will mature in 2009/10, capital. 2008 and £3.660bn at 31 March 2008. compared with 47.1% during 2008/09 and 20.4% during 2007/08. The debt raised has an average maturity Net debt on 31 March 2009 was inflated of around 12 years and an average coupon by around £500m by three issues: On 3 April 2009, SSE entered into a new of around 6.5%. £850m revolving credit facility, provided k the delay to the end of August 2008 in by a group of nine banks, to run until June Placing of Shares implementing increases in domestic 2012. This represented the refinancing On 7 January 2009, SSE conducted prices has resulted in some and up-sizing of an existing £650m facility a book-built, non-pre-emptive placing additional revenue being collected that had been due to mature in November of approximately 42 million new ordinary after 31 March 2009; 2009. SSE has secured bank approval shares of 50 pence each in SSE. The shares for £150m of additional facilities with the were placed at a price of £11.40 each, which same maturity, subject to agreement of was within 1% of the average closing price Financial Management and Balance Sheet documentation. In addition, it has available of SSE shares in the preceding four weeks. Key Performance Indicators to it a further €150m in outstanding Based on this price, the gross proceeds committed corporate bank facilities, of the placing were £479m, representing March 09 March 08 as well as additional available project approximately 4.8% of SSE’s share capital. finance facilities in its Airtricity division. The shares carried the right to SSE’s Adjusted net debt (£bn) 4.822 3.660 interim dividend paid on 27 March 2009 Average debt maturity Financing Investment and carry the right to subsequent dividends. (years) 11.8 8.6 SSE’s investment programme is Underlying interest cover supported by its carefully-maintained The placing of shares was one of a series (excluding SGN) 6.5 11.7 balance sheet, which remains one of of steps taken by SSE which reflects its Shares in issue 920.4 870.1 the strongest in the global utility sector. flexible and prudent approach to financing/­ Scottish and Southern Energy 22 Annual Report 2009 Financial Overview (continued)

March 09 March 08 The effective adjusted current tax rate, £m £m based on adjusted profit before tax*, Reported net finance costs was 24.0%, compared with 25.8% in add/(less) 134.3 32.8 the previous year, on the same basis. Share of JCE*/Associate interest 128.2 127.6 The impact of SSE’s higher capital Interest on convertible debt (0.6) (4.6) expenditure programme and the changes Exceptional foreign exchange loss – (22.2) introduced in Budget 2007 have had, and Movement on derivatives 25.8 20.7 will continue to have, a positive impact on the effective current tax rate. There Adjusted net finance costs 287.7 154.3 was a reported tax credit of £59.0m for Return on pension scheme assets 135.3 141.4 the year. This reflects the deferred tax Interest on pension scheme liabilities (130.1) (117.4) associated with the derivatives mark-to­ Notional interest arising on discounted provisions (5.1) (3.6) market position (IAS 39). Adjusted interest costs** 287.8 174.7 SSE’s contribution to government revenues in the UK, including Corporation * Jointly Controlled Entities Tax, Employers’ National Insurance ** Adjusted finance income and costs for interest cover calculation Contributions and Business Rates, totalled £484.9m during 2008/09, compared with £517.1m in the previous year, a reduction investment and enhanced its future During 2008/09, employer cash which reflects the effect of the changes options by providing additional sources contributions amounted to: introduced in Budget 2007. The total of funding for appropriate investment includes joint ventures and associates. and acquisition opportunities. k £14.5m for the Scottish Hydro Electric scheme; and Net Finance Costs k £56.6m for the Southern Electric The table above reconciles reported net scheme, including deficit repair Convertible Bond Maturity finance costs to adjusted net finance contributions of £36.9m. and Authority to Purchase costs, which SSE believes is a more meaningful measure. In line with this, As part of the Distribution Price Control for Own Shares SSE’s adjusted net finance costs during 2005-2010, it was agreed that allowances for 2008/09 were £287.7m, compared with 76% of deficit repair contributions in respect £154.3m in the previous year. This is of the Southern Electric scheme should mainly due to the increased level of be included in price controlled revenue. SSE has an outstanding 3.75% convertible net debt, including the full-year impact bond which matures on 29 October 2009, of interest costs associated with the At 31 March 2009, there was a net liability which had an initial nominal value of acquisition of Airtricity. arising from IAS 39 of £1,423.6m, before £300m. To date, holders have exercised tax, compared with a net liability of their option to exchange their bonds for The average interest rate for SSE, £117.3m, before tax, at 31 March 2008. Ordinary Shares in the company, now excluding JCE/Associate interest, during The negative movement on derivatives at £8.88 per share, in respect of bonds the year was 5.25%, compared with 5.23% under IAS 39 principally relates to the totalling £284.1m nominal value. New for the previous year. Based on adjusted movement in commodity prices for coal, shares issued as a consequence of these interest costs, underlying interest cover oil, gas, carbon and wholesale electricity. conversions total 31.6 million. A nominal for 2008/09 was 6.5 times (excluding value of £15.9m, or 5.3% of the original interest related to SGN), compared with bond issue, remains outstanding. The total 11.7 times in 2007/08; including interest number of shares in issue at 31 March 2009 related to SGN it was 5.2 times. Tax was 920.4 million.

Within the adjusted net finance costs of During 2008/09, SSE did not purchase £287.7m, the element relating to SGN’s any of its own shares for cancellation. net finance costs was £86.5m (compared To assist the understanding of SSE’s tax The Directors will, however, seek renewal with £82.7m in the previous year), after position, the adjusted current tax charge of their authority to purchase in the market netting loan stock interest payable to SSE. is calculated as follows: the company’s own shares at the Annual Its contribution to SSE’s profit before tax* General Meeting on 23 July 2009 and this was, therefore, £94.0m, compared with March 09 March 08 remains a benchmark against which £78.8m in the previous year. £m £m financial decisions are taken.// Reported tax (credit)/charge (59.0) 210.6 Pensions add back: In line with the IAS 19 treatment of pension Share of JCE/Associate tax 40.4 10.7 scheme assets, liabilities and costs, less: pension scheme liabilities of £273.5m Deferred tax (39.5) (31.5) are recognised in the balance sheet at Tax on exceptional items 31 March 2009, gross of deferred tax. This and certain represents an increase in net liabilities re-measurements 358.5 127.4 of £224.4m compared with the position Adjusted current tax charge 300.4 at March 2008. 317.2 Scottish and Southern Energy 23 Annual Report 2009 Corporate Responsibility

Safety SSE aims to create value for shareholders by maintaining a strong emphasis on its Number of people six core values, which include safety and sustainability. During 2008/09, the number of lost-time and reportable injuries within the company was 0.07 per 100,000 hours employed by SSE worked, compared with 0.04 in the previous year and 0.05 in 2006/07.

SSE is now also focusing on its Total Recordable Incident Rate (TRIR), which up around 1,900 includes medical treatment, as well as lost- time and reportable injuries. TRIR is a more comprehensive measure and is comparable with worldwide standards, allowing a more to over 18,500 effective benchmarking of performance to take place. In 2008/09, the TRIR for SSE was 0.16 per 100,000 hours worked. BUSINESS REVIEW BUSINESS

The number of serious, or potentially serious, blameworthy road traffic accidents involving employees driving company vehicles was 0.38 per 100 vehicles, Everyone who is employed by compared with 0.18 in the previous year.

SSE is expected to demonstrate In September 2008, an employee of Hochtief AG, the principal contractor, and deliver responsible business lost his life at the site of the new Glendoe practice in whatever they do. hydro electric scheme. The circumstances surrounding the incident have since been As a result, SSE does not have a the subject of detailed investigation. This loss of life remains a source of great corporate responsibility division; sadness for everyone associated with it is not an add-on, and should the project. not be treated as such. Environment SSE’s target for any given year is zero environmental incidents which result in it being served with a formal statutory notice by either the Environment Agency or the Scottish Environment Protection Agency (SEPA). In 2008/09, SSE was served with no such notices as a result of an environmental incident. SEPA is continuing to investigate an incident in November 2008 where diesel escaped from a holding tank at SSE’s Loch Carnan Power Station on Uist. Safety Service Efficiency Sustainability Excellence Teamwork Teamwork On 31 March 2009, SSE employed We keep things simple, do the work that adds value and 18,795 people, an increase of 1,903 on avoid wasting money, materials, energy or time. This means the previous year. December 2008 saw setting the right priorities and ensuring that all other activities the tenth anniversary of SSE’s formation. take second place to supply and distribution customers Its successes since then reflect the receiving the highest-possible quality of service. ongoing professionalism and enthusiasm of employees, guided by SSE’s ‘Teamwork’ value which states: ‘We support and value Total Performance-based Income Earned our colleagues and enjoy working together (Electricity Networks; All Criteria) (£m) in an open and honest way.’ 2009 19.4 £19.4 m The Good Companies Guide 2008 18.0 In November 2008, The Co-operative 2007 13.3 Asset Management’s second annual Good Companies Guide was published./­ Scottish and Southern Energy 24 Annual Report 2009 Corporate Responsibility (continued)

The Guide is a fund management ranking of FTSE 350 companies’ performance In November 2008, The Co-operative Asset on environmental, social and governance Management’s second annual Good Companies Guide (ESG) issues. SSE was the overall winner because it has ‘shown vision and initiative was published. The Guide is a fund management in being an early mover in renewable energy and domestic energy efficiency’. ranking of FTSE 350 companies’ performance on environmental, social and governance (ESG) issues. Corporate Responsibility Index Business in the Community’s (BitC) SSE was the overall winner because it has ‘shown Corporate Responsibility Index provides an authoritative benchmark for companies vision and initiative in being an early mover in to evaluate their management practice in renewable energy and domestic energy efficiency’. four key areas of corporate responsibility (community, environment, marketplace and workplace) and performance in a range of environmental and social impact should be. SSE believes the fundamental areas material to their business. In the responsibility on the part of companies results of the Index for 2008, SSE retained is to ensure that their overall business its performance band of ‘Platinum’. model and strategy, and their values and culture, are designed with risk BitC has introduced an additional band, firmly in mind. ‘Platinum Plus’, to test, with additional scrutiny, the connectivity between SSE’s strategy is to deliver sustained companies’ business strategy and a real growth in the dividend payable responsible and sustainable business to shareholders through the efficient approach. SSE was advised in May 2009 that operation of, and investment in, a balanced it had secured this ‘Platinum Plus’ status, range of regulated and non-regulated one of just seven companies to do so. energy-related businesses. In practice, this means SSE derives income and profit Corporate Responsibility Report 2009 from businesses which are subject to SSE has reported in detail on corporate economic regulation and businesses responsibility issues in 2008/09 in which are not. At the same time, those its Corporate Responsibility Report businesses have a common core: energy. 2009 which is available online at www.scottish-southern.co.uk. The practical effect of this is to limit both the extent of any single risk and the value The report considers the four main areas associated with it, and the need to limit of impact identified by Business in the the value at risk is at the heart of SSE’s Community: Workplace, Environment, decision-making processes. SSE is the only Community and Marketplace. In each electricity and gas company listed on the area, the report considers the key London Stock Exchange with a business question SSE must address, identified model which is capable of offering such by relating relevant concerns to the issues balance and such a framework for limiting over which SSE has greatest influence. the value at risk.

Within the report, which is aimed at any The strategy and business model, and individual or organisation with an interest therefore risk management, are supported in how SSE goes about its business, by the ‘SSE SET’ of core values – Safety, there is a review of SSE’s performance Service, Efficiency, Sustainability, in 2008/09 and summaries of key events Excellence and Teamwork – and by the across the business. maintenance of an organisational culture in which the individual, status and seniority Data presented in the report is take second place to teamwork, knowledge independently assured by Environmental and experience. Resources Management Ltd. Within this framework, SSE has in place Detail and analysis included in the a comprehensive approach for managing Corporate Responsibility Report gives risks and maintaining internal controls, further context to an extensive list of such that its strategy is not undermined Performance Indicators also presented by failures or misjudgements. These are in this Annual Report. set out in full on pages 53 and 54.//

Risk Management There are many interpretations of what ‘risk management’ should mean and Scottish and Southern Energy 25 Annual Report 2009 Performance Indicators

2007 2008 2009 Change Financial Overview Adjusted profi t before tax* – £m 1,079.3 1,229.2 1,253.7 +2.0% Adjusted earnings per share* – pence 92.5 105.6 108.0 +2.3% Dividend per share – pence 55.0 60.5 66.0 +9.1% Capital expenditure – £m 663.4 810.3 1,279.8 +57.9% Adjusted net debt – £bn 2.23 3.66 4.82 +31.7% Underlying interest cover – times 11.0 11.7 6.5 -44.4% Dividend cover – times 1.68 1.73 1.57 -9.2% Generation and Supply Operating profit* – £m 632.5 711.1 832.0 +17.0% Electricity generation capacity – MW 10,017 10,542 10,755 +2.0%

Electricity generated – TWh 51.6 47.9 41.2 -14.0% REVIEW BUSINESS Energy generation capacity – renewable – MW 1,518 2,036 2,230 +9.5% Electricity generation capacity qualifying for ROCs – hydro and wind – MW 568 748 877 +17.2% Hydro storage – % of maximum water for generation 75 73 73 0.0% Hydro output – GWh 3,767 3,518 3,316 -5.7% Gas-fired power station availability – % 95 95 76 -20.0% Gas-fired power station thermal efficiency – % 49.5 49.2 51.0 +3.7% Coal and biomass-fired power station availability – % 92 91 89 -2.2% Coal and biomass-fired power station thermal efficiency – % 36.1 35.9 34.9 -2.8% Power station water consumption – million cubic metres 3.18 2.93 2.94 +0.3%

Power station CO2 emissions – million metric tonnes 25.88 22.72 19.28 -15.1%

Power station CO2 emissions – kilograms per kWh 0.555 0.496 0.491 -1.0%

Power station SO2 emissions – metric tonnes 50,776 37,125 17,318 -53.4%

Power station SO2 emissions – grams per kWh 1.086 0.903 0.441 -51.2% Power station NOx emissions – metric tonnes 44,120 39,643 21,046 -46.9% Power station NOx emissions – grams per kWh 0.944 0.964 0.536 -44.4% Electricity supplied – TWh 50.9 55.7 63.3 +13.6% Energy customer numbers – millions 7.75 8.45 9.05 +7.1% Electricity customers – millions 4.95 5.28 5.55 +5.1% Gas customers – millions 2.80 3.17 3.51 +10.7% Talk customers – 000s 97 165 217 +31.5% Gas boiler customers – 000s 22 70 115 +64.3% Complaints to energywatch 840 615 95 N/A Complaints to Consumer Focus N/A N/A 183 N/A Referrals to Consumer Direct N/A N/A 504 N/A Electricity disconnections – per 1,000 customers 0.03 0.03 0.02 -33.3% Gas disconnections – per 1,000 customers 0.22 0.22 0.07 -68.2% Energy Systems Power Systems operating profi t* – £m 368.0 382.9 403.7 +5.4% Power Systems capital expenditure – £m 204.5 264.4 314.6 +19.0% Regulatory Asset Value – £bn 2.6 2.7 2.9 +7.4%

Positive Neutral or Not Applicable Negative Scottish and Southern Energy 26 Annual Report 2009 Performance Indicators (continued)

2007 2008 2009 Change Southern Electric Power Distribution operating profit* – £m 224.0 232.7 243.3 +4.6% Scottish Hydro Electric Power Distribution and Transmission operating profit* – £m 144.0 150.2 160.4 +6.8% Electricity distributed – TWh 42.4 42.9 42.9 0.0% Southern Electric Power Distribution average customer minutes lost 72 67 66 -1.5% Southern Electric Power Distribution interruptions per 100 customers 75 66 64 -3.0% Southern Electric Power Distribution mains in commission – kilometres 74,832 75,747 76,269 +0.7% Scottish Hydro Electric Power Distribution average customer minutes lost 77 72 75 +4.2% Scottish Hydro Electric Power Distribution interruptions per 100 customers 79 69 76 +10.1% Scottish Hydro Electric Power Distribution mains in commission – kilometres 46,221 46,454 46,662 +0.4% Scottish Hydro Electric Power Distribution transmission mains in commission – kilometres 4,913 4,913 4,913 0.0% Scotia Gas Networks operating profit (SSE share) – £m 103.1 161.5 180.5 +11.8% Scotia Gas Networks capital expenditure/repair expenditure – £m 295.2 379.0 382.8 +1.0% Scotia Gas Networks mains in commission – kilometres 73,661 73,705 73,995 +0.4% Scotia Gas Networks units distributed – TWh 162.3 169.3 173.5 +2.5% Scotia Gas Networks Regulatory Asset Value – £bn 3.2 3.5 3.6 +2.9% Gas Storage Operating profit* – £m 55.9 50.9 42.7 -16.1% Customer nominations met – % 100 100 100 0.0% Telecoms Operating profit* – £m 13.9 14.3 15.5 +8.4% Operational faults fixed within service level agreements – % 94 98 98 0.0% Project delivery on standard projects – % 98 96 97 +1.0% Contracting, Connections and Metering Operating profit* – £m 61.7 68.7 74.8 +8.9% New electrical connections – 000s 44.6 42.8 36 -15.9% New gas connections – 000s 9.2 8.2 7.3 -11.0% Out-of-area networks in operation 24 33 47 +42.4% Contracting order book (year end) – £m 95 99 101 +2.0% Meters read once a year – % 95.1 95.4 95.0 -0.4% Meters read twice a year – % 78.7 80.8 77.0 -4.7% Safety Lost-time and reportable accidents 11 11 21 +90.9% Lost-time and reportable accidents – per 100,000 hours worked 0.05 0.04 0.07 +75.0% Serious or potentially serious road traffi c accidents 19 13 32 +146.2% Serious or potentially serious road traffi c accidents – per 100 vehicles 0.29 0.18 0.38 +111.1% Injury-free business units 66 72 112 +55.6% Environment Breaches of IPC/IPPC 2 2 1 -50.0% Oil leaked – litres 31,761 42,189 27,931 -33.8% Waste produced – offi ces and depots tonnes 25,052 30,299 27,120 -10.5% Waste sent to landfi ll – offi ces and depots tonnes 7,787 8,282 6,979 -15.7%

Positive Neutral or Not Applicable Negative Scottish and Southern Energy 27 Annual Report 2009

2007 2008 2009 Change Water consumption in principal offi ces – cubic metres 133,822 109,167 105,557 -3.3% Water consumption in principal offi ces – cubic metres per whole time equivalent (WTE) 10.4 7.4 6.1 -17.6% Energy Consumption in operational buildings – GWh 34.2 27.7 31.5 +13.7% Energy consumption in principal offices – GWh 31.1 32.6 39.0 +19.6% Energy consumption in principal offices – MWh per WTE 4.9 4.6 3.9 -15.2% Distance travelled on SSE business – million kilometres 198.51 212.63 247.24 +16.3% Distance travelled on SSE business – kilometres per WTE 15,416 13,864 13,267 -4.3% Business fl ights 9,311 7,897 8,961 +13.5% Business flights – per 1,000 employees 693 467 523 +12.0% Business flights – million kilometres 9.22 7.36 6.66 -9.5% Business rail journeys 2,545 9,706 12,809 +32.0% Rail journeys – per 1,000 employees 189 633 748 +18.2%

Business rail journeys – million kilometres 0.86 2.83 3.86 +36.4% REVIEW BUSINESS Operational vehicles business travel – million kilometres 156.90 168.91 183.15 +8.4% Company cars business travel – million kilometres 31.52 31.38 33.54 +6.9% Estimated travel saved by use of video conferencing facilities – million kilometres 1.15 1.09 1.36 +24.8% Marketplace Homes insulated under the Carbon Emissions Reduction Target (CERT) – 000s N/A N/A 191 N/A Low energy lamps subsidised – 000s 560 9,100 16,000 +75.8% Customers registered for Priority Services Register – 000s 297.8 367.1 518.3 +41.2% Customers with tailor made payment plans – 000s 229.0 200.0 237.5 +18.8% Customers on loyalty plans – millions 1.34 1.86 2.32 +24.7% New suppliers 1,112 1,024 1,037 +1.3% Suppliers for more than three years 5,626 4,270 4,029 -5.6% Workplace Employees – headcount 13,427 16,892 18,795 +11.3% Employees – monthly average 13,053 15,777 18,196 +15.3% Average age of employees – years 40 41 38 -7.3% Absence from work per employee – days 6.01 6.03 5.89 -2.3% Turnover of employees – annual % 13.8 11.9 11.5 -3.4% Gender split – all employees – male/female 75/25 74/26 74/26 N/A Gender split – Leadership Group – male/female N/A 88/12 87/13 N/A Employees in Share Incentive Plan – % 44 38 38 0.0% Community Employees in receipt of ‘Into Action’ 278 502 498 -0.8% Employees participating in ‘Quids In’ 943 1,375 1,247 -9.3% Community benefit paid – £000s 292 906 1,162 +28.3% Charitable donations – £000s 685 873 1,001 +14.7% Research and development – £m 6.3 3.7 4.4 +18.9% Committed investment in clean-tech ventures (cumulative) – £m 40 60 88 +46.7% Scottish and Southern Energy 28 Annual Report 2009 Generation and Supply

Introduction SSE owns around 10,700 megawatts (MW) of capacity for generating electricity, Renewable making it the second largest generator across the UK and Ireland. The large majority (over 10,300MW) of this capacity is in Great Britain, which currently has energy output almost 80,000MW in total. The remainder (375MW) is in Northern Ireland and the Republic of Ireland, where there is an all- island Single Electricity Market which is up 28% to over separate from the market in Great Britain. SSE’s total capacity includes its share of joint ventures and associates and comprises around: 5,000GWh k 4,500MW of gas- and oil-fired capacity; k 4,000MW of coal-fired capacity (with biomass ‘co-firing’ capability); and k 2,200MW of renewable (hydro, wind and dedicated biomass) capacity.

This gives SSE diversity in fuels for generating electricity and avoids dependency on a single technology. As a result, SSE has significant optionality in the management of its power stations. It is this diversity and the related optionality which enable SSE to manage the risks associated with primary fuel procurement during periods of volatile wholesale energy prices.

As at 31 March 2009, SSE supplied energy to 9.05 million customer accounts, making The amount of electricity generated it the second largest supplier within Great Britain’s competitive electricity and gas by SSE from hydro electric stations, supply market, which has around 51 million wind farms and biomass plant during domestic and business accounts in total. It also supplied energy to 50,000 customers 2008/09 rose by 28% to 5,182GWh in Ireland. Its responsibility as supplier to customers is to procure the electricity (gigawatt-hours). SSE is the UK’s and gas they need, arrange for it to be distributed to them through the relevant largest generator of electricity from networks and provide the associated renewable sources. services such as metering and billing. Wholesale gas and wholesale electricity are transacted like any other commodity in a competitive market. SSE purchases the gas and some of the electricity it needs Safety Service Efficiency Sustainability Excellence Teamwork to supply customers via bilateral contracts of varying lengths and through trading in We aim to operate ethically, taking the long-term view the wholesale markets. It also buys gas, to achieve growth while safeguarding the environment. coal and oil to use in the production of This means actively supporting ways of changing the way in electricity from its power stations. which energy is produced and consumed, including maximising the amount of electricity produced from renewable sources. Following the extension of power purchase agreements with Seabank Power Ltd, in which SSE has a 50% stake, which took place in 2007/08, none of the long-term Total Renewable Energy Capacity (MW) agreements under which SSE purchases 2009 2,230 electricity is due to expire during the 2,230MW 2009/10 financial year. Power purchase 2008 2,036 agreements with Barking Power (in which 2007 1,518 SSE has a 30.4% stake) and Derwent Cogeneration Ltd (in which SSE has a Scottish and Southern Energy 29 Annual Report 2009

49.5% stake) are, however, due to expire in of electricity, including power stations These 2020 targets are, in fact, only interim September 2010. Both agreements contain in which it has a part-ownership or milestones in a long-term transition now extension options. The current contract, contractual interest, compared with under way, from a UK energy supply with under which British Energy supplied SSE 47.9TWh in the previous year (including all fossil fuels at its centre to one based with 4.4 terrawatt-hours (TWh) of electricity of Airtricity’s output). SSE also purchased largely on the use of renewable sources of during 2008/09 and will supply 5TWh 5.9TWh of electricity through long-term energy and other low carbon technologies. during 2009/10 (arranged as part of SSE’s contracts with other generators. In the acquisition of the SWALEC energy supply year, it supplied 29.7TWh of electricity to its In parallel with the demand for investment business in 2000) ends in March 2011. domestic and small business customers in renewable energy, the UK will need and 33.6TWh was supplied under contract to provide replacement capacity for SSE’s Trading and Risk Management to industrial and commercial customers. conventional generation plant which is team is responsible for its participation in Any net balances were traded in the expected to retire on a shorter timescale – wholesale markets for electricity and gas, wholesale electricity market. the next decade. As the UK Secretary of as well as markets for coal, oil and carbon State for Energy and Climate Change said dioxide emissions allowances. Through It is likely that customers’ demand for in December 2008: ‘We must keep the analysis of generation plant availability, electricity – and gas – in the UK will be lower lights on in a world where we are net customer demand and its contractual in 2009/10 than it was in the previous year importers of energy. By 2020 a third of position SSE can assess, and therefore as a result of both the impact of investment our power plants will be closed due to manage, its exposure to market prices. in energy efficiency and the downturn in age or rising environmental standards.’ BUSINESS REVIEW BUSINESS the economy. In this context, SSE’s long- In summary, SSE assesses Generation standing approach of actively maintaining Fundamentally, the need for the UK to and Supply as a single value chain within an balance in its portfolio of assets, contracts maintain a reasonable margin between integrated business. This means its power and customers is of particular relevance electricity generation capacity and stations and fuel supply contracts are used and means it is not over-exposed to electricity demand will reinforce the value to support performance in electricity supply, variations in demand for energy. of existing and available power-producing mainly through deploying flexibility and plant over the long term. In addition, a optionality to respond to customer demand Generation Context balance of fuels used within the generation and market conditions. As a result, SSE In June 2008, the consultation document portfolio will remain critical in providing seeks to maintain a well-balanced portfolio setting out the UK’s renewable energy security of supply, through allowing of assets, contracts and customers, within strategy stated that energy policy in the UK diversity of primary energy sources, which there is effective risk management faces two very serious challenges: tackling and will support the maximum possible through diversity in earnings opportunities, climate change by reducing emissions of deployment of renewables through proper and which functions and is managed as an carbon dioxide and ensuring the country’s integration of both energy and system integrated whole. This whole is, therefore, energy supply remains secure. services provision. All of this is likely to greater than the sum of its parts – not least require the largest investment programme because earnings should be more resilient to To address these challenges, the UK and in the generation sector since privatisation, a wide range of commodity price outcomes. Irish governments (along with all other with renewable energy at its heart. Member States) are required to contribute Generation and Supply towards the achievement of a binding target, Over the next three years, SSE believes Performance Overview that 20% of the EU’s all-energy consumption that a combination of lower demand for Operating profit* in Generation and Supply must come from renewable sources by electricity, sufficient generating plant was £832.0m, compared with £711.1m 2020, which was given final approval in April remaining open and new generation in the previous year, contributing 54% of 2009. For the UK, the national target is 15%; capacity coming on-stream (particularly SSE’s total operating profit* in 2008/09. for the Republic of Ireland, it is 16%. In new combined cycle gas turbine (CCGT) (SSE reports the underlying financial practice, this means increasing, to over 30%, plant and plant for generating from performance of Generation and the proportion of electricity to come from renewable sources) should ensure that the Supply excluding the impact of IAS 39 such sources in the UK and an increase to production of electricity will be able to meet re-measurements which are unrealised 40% is required in the Republic of Ireland. the demand in all likely circumstances. as it continues to believe that this does Beyond that, the position is less predictable, not represent underlying business In addition, the Climate Change Act 2008, with uncertainties affecting both the likely performance.) The increase in operating passed by the UK Parliament, includes total of electricity generating capacity and profit was supported by the value of the not only a long-term target for emissions the likely level of demand from customers. higher output of renewable energy delivered reductions but also a legally binding In addition, the growth in capacity for by SSE, following the acquisition of Airtricity trajectory towards this target. The Act generating electricity from renewable in February 2008 and the completion of requires the UK government to set sources will have an impact on how gas- new renewable energy developments. carbon budgets fixing binding limits on and coal-fired capacity operates on a day- greenhouse gas emissions over five-year to-day basis. In any event, the value of Total revenue for Generation and Supply periods. Alongside its Budget 2009, the established and continuing capacity is likely was £24.4bn, which accounted for 93% UK government confirmed it would aim to be reinforced. It is in this context that of SSE’s total revenue in 2008/09, of which to cut greenhouse gas emissions by 34% Ofgem has launched ‘Project Discovery’, £8.5bn was in relation to sales of electricity by 2020, compared with 1990 levels. It was a review of the medium-term outlook for and gas to industrial, commercial and responding to the findings of the first report energy markets in Great Britain, as the domestic customers. by the independent Climate Change requirement to retire power generating Committee, which set out what the UK’s plant to conform with environmental and Electricity Generated and Supplied carbon emissions reduction targets for other requirements becomes closer. SSE During 2008/09, SSE generated 41.2TWh the period to 2020 should be. is fully involved in this review with Ofgem.// Scottish and Southern Energy 30 Annual Report 2009 Generation

Medway and Peterhead) achieved 76% Generation of their maximum availability to generate electricity, excluding planned outages, Sustainability, Diversity, Optionality compared with 95% availability in the previous year. This contributed significantly SSE owns around 10,700MW of electricity to the reduction in the amount of electricity generated by SSE at gas-fired power generation capacity in the UK and Ireland, stations in which it has an ownership or comprising around: 4,500MW of gas- and contractual interest, which was 28TWh in 2008/09 (including 15.3TWh from wholly- oil-fi red capacity; 4,000MW of coal-fi red owned stations), compared with 31TWh capacity (with biomass co-firing capability) and in the previous year (including 18.2TWh 2,200MW of hydro, wind and dedicated biomass from wholly-owned stations). capacity, making it the UK’s largest generator The plant at Peterhead, Keadby and Fife performed very well during 2008/09, of electricity from renewable sources and achieving 97.5% availability. The reduction giving it the most diverse mix of fuels. in output is, therefore, attributable to significant difficulties at Medway, where availability was affected by technical issues leading to unplanned outages and also emergent issues arising during planned inspections, affecting one of 10.7 GW 41.2 TWh £4.3bn the gas turbines and the steam turbine. Capacity Output 08/09 Investment 08-13 Resolving these difficulties proved to be a complex and time-consuming task, involving contractors, station employees, insurance providers and SSE’s recently- Capacity – Composition established Engineering Centre. With Gas/Oil 42% (4.5GW) its asset management capability adding Coal/Biomass 37% (4.0GW) a new dimension to SSE’s engineering rigour, the Centre is playing a key role in Renewable 21% (2.2GW) minimising the delay in Medway’s return to service as is SSE’s policy of holding important power plant components. The return to service is expected shortly.

SSE’s experience at Medway was not an isolated one. Across the electricity Key Priorities generation sector in the UK a number of k Complying with safety and environmental requirements gas-fired power stations which are now k Maintaining availability of power stations to generate into their second decade of operation, k Investment in refurbishment of existing assets including Seabank, in which SSE has a k Delivering new plant for generating electricity 50% stake, have had unexpected and prolonged outages. While the underlying quality of SSE’s power generation assets is not in doubt, its Engineering Centre Generation Objectives In achieving these objectives, SSE’s target is reviewing plant design and plant In this context, SSE’s key objectives is to reduce by 50% the carbon dioxide operation within the BETTA (British in Generation remain relevant and intensity of electricity produced at power Electricity Trading and Transmission appropriate. They are to: stations in which it has an ownership or Arrangements) framework. This review contractual interest, over the period from has been supported by external k comply fully with all safety standards 2005/06, the first full year after it acquired engineering advisers and has indicated and environmental requirements; coal-fired power stations, to 2020. that the large majority of prolonged k maintain a diverse portfolio of power unplanned outages relate to a specific stations, with the flexibility to respond Gas-fired Generation – Operations technical issue regarding equipment to customer demand and market Good performance in Generation and provided by one supplier, rather than any conditions; Supply is dependent, first and foremost, general underlying problems with plant. k ensure those power stations are on plant at power stations being available to available to generate electricity; generate electricity as and when required. The outcome of this review will inform k operate power stations efficiently SSE owns 4,500MW of gas- and oil-fired SSE’s long-term asset management to achieve the optimum conversion electricity generation capacity, including and investment planning policies, as of primary fuel into electricity; and its share of joint ventures. will the impact of increasing electricity k develop and pursue a range of options for generation from renewable sources, adding to its portfolio of power stations, During 2008/09, its principal wholly-owned which means gas-fired and coal-fired and thus support security of supply. gas-fired power stations (Fife, Keadby, power stations will have to be increasingly Scottish and Southern Energy 31 Annual Report 2009

flexible and run at lower load factors Generation Key Performance Indicators than has historically been the case. March 09 March 08 Total electricity generation capacity (GW) 10.7 10.5 Gas-fired Generation – Investment Gas-fired station availability (%) 76 95 Work on the commissioning of Marchwood Total output from gas-fired power stations (TWh)* 15.3 18.2 Power Ltd’s new 840MW CCGT plant in Coal-fired station availability (%) 89 91 Southampton is now well under way. Total output from coal-fired power stations (TWh)* 7.8 12.0 Following the first firing of the gas turbines Co-firing biomass output qualifying for ROCs (GWh) 267 368 in March 2009, power from the station Total output from hydro schemes (GWh) 3,316 3,518 is now being exported to the electricity ROC-qualifying output from hydro schemes (GWh) 1,656 1,702 network. Marchwood Power Ltd is a 50:50 Wind farm availability (%) 96 96 joint venture between SSE and ESB Total UK and RoI output from wind farms (GWh) 1,718 499** International, in which £159m has so far UK ROC-qualifying output from wind farms (GWh) 953 389** been invested by SSE. All of the station’s Output from RoI wind farms (GWh) 765 110** output is contracted to SSE. It remains ROC-qualifying output from dedicated biomass (GWh) 148 33** on course to be in commercial operation in time for the winter of 2009/10. * Wholly-owned With a net thermal efficiency in excess of ** Includes post-acquisition by SSE output only BUSINESS REVIEW BUSINESS 58%, Marchwood will be one of the most efficient gas-fired power stations in the UK. Moreover, the plant was procured before the In addition, SSE has identified a series only meet up to 10% of their Renewables significant increase in costs experienced in of options for other CCGT plant. These Obligation from this technology. the electricity generation sector in 2007 and include the potential development of new Nevertheless, co-firing biomass is an 2008, making it a particularly well-timed capacity at Keadby power station and in established means of reducing carbon and well-founded investment. April 2009, it secured an agreement to dioxide emissions and the revised ROC connect a new 850MW power plant to the arrangements provide an adequate Although it would be unwise for SSE as electricity transmission network from 2016. framework to sustain it in the future. a company, or the UK as a country, to run Barking Power Ltd, in which SSE has a the risk of becoming over-dependent on 30.4% stake, has secured consent to Coal and Biomass Generation – Investment a single fuel, CCGT technology is likely develop a new 470MW CCGT plant, which In November 2005, SSE opted in to the to remain the benchmark technology in would effectively add around 140MW to the LCPD all of the capacity at Fiddler’s Ferry generation for some years to come, making portfolio of generation assets owned by SSE. and half of the capacity at Ferrybridge a growing contribution to meeting the UK’s (3,000MW in total). As a result, the electricity requirements. This is because Coal and Biomass Generation – Operations operation of that capacity must comply of its high thermal efficiency, relatively During 2008/09, SSE generated 7.8TWh of with the Emission Limit Value (ELV) for low costs and short construction time. electricity at its coal-fired power stations sulphur dioxide which came into effect at Fiddler’s Ferry and Ferrybridge, on 1 January 2008. By making them In May 2009, SSE entered into an compared with 12.0TWh in the previous compliant with the ELV, the stations’ agreement to acquire Abernedd Power year. The stations achieved 89% of their contribution to the security of the UK’s Company Limited from BP Alternative maximum availability to generate electricity supplies is being extended and Energy. Abernedd has applied for consent electricity, excluding planned outages, SSE will continue to have the country’s to construct and operate a new CCGT which was a reduction compared with most diverse electricity generation power station, with a capacity of over the previous year due to additional work portfolio. Plant which is not opted-in, 800MW, on a brownfield site in Baglan emerging during asset upgrades as a such as the other 1,000MW of capacity at Bay in South Wales, where there is result of materials and supplier issues. Ferrybridge, operates under restrictions already in place electricity transmission, Their output during the year was on its ability to generate electricity and gas and water infrastructure for the first significantly affected by the need to must close in 2015. phase of the power station. The total cash operate within the constraints imposed consideration will be determined by the by Article 5(1) of the Large Combustion Opted-in plant could initially comply progress of the development. Plant Directive (LCPD) for a longer period with the Directive by operating under than expected (see below). the requirements of its Article 5(1), In line with that, and subject to timely which limits operation to 2,000 hours planning consent being secured, SSE The stations ‘co-fire’ fuels from renewable per year, in advance of completing the hot expects to construct the new power sources (biomass) in order to displace commissioning of flue gas desulphurisation station in two phases to maximise plant fossil fuels. During the year, their output (FGD) equipment. Having been scheduled flexibility. In the first phase, a unit with qualifying for ROCs (Renewable Obligation to finish by the end of July 2008, SSE’s capacity of over 400MW will be developed, Certificates – see below) was 267GWh, derogations under Article 5(1) eventually with a view to becoming operational compared with 368GWh in the previous ended in January 2009 (Fiddler’s Ferry) around 2013; a second unit, with a similar year (included within the above total and February 2009 (Ferrybridge). capacity, will become operational around for the stations as a whole). 2016. The two-unit approach gives SSE SSE’s original decision to opt the plant in greater flexibility in the timing and nature From 1 April 2009, electricity output to the LCPD was unavoidably late, given of the development and a final investment resulting from co-firing receives 0.5 ROCs it only acquired the power stations in July decision on the first phase will be taken per MWh (compared with 1.0 ROC per MWh 2004 and given the uncertainty around by the end of this financial year. previously) and electricity suppliers can details of public policy which then applied./­ Scottish and Southern Energy 32 Annual Report 2009 Generation (continued)

This meant the original timetable for FGD Supercritical Boiler technology to replace of RockTron Ltd, in September 2008, installation was particularly challenging. existing coal-fired capacity and deliver enabling it to secure a share of the income Moreover, ‘retro-fitting’ FGD equipment a significant reduction in the carbon from the ash separation plant, in addition to to well-established power stations is dioxide emissions per kilowatt-hour the benefits which will result from avoiding necessarily complex, with significant of electricity produced. the environmental liabilities associated technical challenges which don’t arise with ash production and storage. in respect of ‘new build’ projects. SSE’s In April 2009, the UK government set out capital investment in FGD equipment has proposals for the basis on which coal-fired EU Emissions Trading Scheme totalled £240m. power stations will be permitted in the Phase II of the EU Emissions Trading future, in advance of a full consultation Scheme (EU ETS) began on 1 January The installation of FGD equipment means planned for this summer. These include: 2008. Across its electricity generation the power stations are able to use higher- no new coal-fired power stations without portfolio (taking account of contractual sulphur coal mined in the UK. As a result, Carbon Capture and Storage (CCS) shares), SSE now has an allocation of 16.8 SSE has entered into an agreement demonstration; and full-scale ‘retrofit’ million tonnes of carbon dioxide emissions with UK Coal, under which it will obtain of CCS within five years of the technology allowances per annum. Its emissions 3.5 million tonnes of deep- and surface- being independently judged as technically allowances requirement for 2008/09, mined coal from Great Britain, including and commercially proven. Against this beyond those allocated under EU ETS, Kellingley Colliery in West Yorkshire, to emerging public policy background, a was 2.5 million tonnes. This compares provide fuel for Ferrybridge power station decision on the main use of the part of the with 6.7 million tonnes in the previous year. between late 2009 and 2015. This should Ferrybridge site which has been opted out In addition, Marchwood Power Ltd has an be enough to meet around 15% of the of the LCPD is unlikely to be taken until allocation of five million tonnes reserved to station’s requirements during that period. 2010 at the earliest. it from when it is commissioned to the end In addition, SSE has agreed to advance a of Phase II. During 2008/09, the price of secured loan to UK Coal, on which it will During 2008/09 SSE supported the study allowances ranged from around €8 to receive interest, to be repaid by 2014. undertaken by the Scottish Centre for €28 per tonne; the market itself remains Carbon Storage, which found that industrial relatively new and has yet to mature fully. The LCPD also requires reduced emissions carbon dioxide produced in the UK during of nitrogen oxides, and SSE has already the next 200 years could be stored securely At the same time, the EU ETS represents invested £31.0m to install SOFA (Separated beneath the North Sea. The study was the an additional and growing cost for Overfire Air) and BOFA (Boosted Overfire most comprehensive CO2 source-to-store generators, who are having to continue Air) equipment at the stations. From 2016 analysis ever performed in the UK. SSE to produce electricity, but with increasing limits on those emissions from power is also sponsoring the OxyCoal 2 project constraints on emissions of carbon dioxide. stations will be tightened significantly. in Renfrew, Scotland. This project seeks Moreover, it was confirmed in December As a result, SSE is undertaking a front-end to demonstrate the benefits of oxyfuel 2008, that from 2013, all of the carbon engineering design (FEED) study, which it technology for carbon capture on coal- dioxide emissions allowances for electricity expects to complete during 2009/10, into fired power plants. producers will be auctioned. On this basis, options for installing Selective Catalytic it is erroneous to characterise allocations Reduction (SCR) technology at Fiddler’s The number and variety of issues that of carbon dioxide emissions allowances Ferry and is also considering the option could affect electricity generation from as a ‘windfall’. In fact, they represent a for Ferrybridge. The alternative to fitting coal-fired (and, indeed, gas-fired) plant prudent and practical means of ensuring SCR is to operate the station within limits reinforces SSE’s commitment to developing the EU ETS is successfully phased in and required under a derogation from the a number of options to utilise the assets established for the long term, without LCPD’s requirements. SSE’s analysis of the at the Ferrybridge site. posing any risk to electricity production – issues around installing SCR will also take and thus to meeting customers’ energy into consideration the progress of the draft Coal and Biomass Generation – requirements – through the sudden EU Industrial Emissions Directive which, Sustainability imposition of a major new burden if implemented, could replace the LCPD. The development by Lafarge Plasterboard on generators. Ltd of a plasterboard factory at Ferrybridge As the UK Secretary of State for Business has been completed. The plant is Emissions of Carbon Dioxide said in September 2008, coal is a critically operational and using the gypsum In 2008/09, emissions of carbon dioxide important fuel for the UK, because of its produced on site as a result of FGD from power stations in which SSE has an flexibility, its availability and because it in the production of plasterboard. ownership or contractual interest totalled reduces reliance on imported gas. SSE 19.3 million tonnes, compared with is continuing to examine a range of The development by RockTron (Widnes) Ltd 22.7 million tonnes in the previous year. options for development at Ferrybridge, of an ash separation plant at Fiddler’s Ferry The scale of this fall clearly reflects the following the expected closure in 2015 of is now complete and moving into operation. unusually low output of electricity from that plant (1,000MW) which is not opted It removes and processes all fresh ash SSE’s coal-fired power stations resulting in to the LCPD. This will leave the station produced by the power station, and much from Article 5(1) constraints during the with significant assets in terms of land, of that currently stored in lagoons at the installation of FGD equipment. a connection to the electricity grid, site, turning it into constituent parts which cooling water and a railhead. A number will become marketable mineral products, Assuming it displaced electricity produced of options to utilise these assets, featuring with the largest volume being initially from coal-fired power stations, the output a range of fuels and technologies, are used as cement substitutes. of SSE’s wind farms and conventional being assessed. They include the use hydro electric schemes (see below) saved of coal-based Integrated Gasification SSE acquired 17.5% of the equity in around 4.5 million tonnes of carbon Combined Cycle technology or Advanced RockTron (Widnes) Ltd, a subsidiary dioxide in 2008/09. Scottish and Southern Energy 33 Annual Report 2009

with the 1990 baseline), a target which Electricity Generation Capacity (GW) followed the Climate Change Act 2008.

In November 2008, the UK government announced proposals to extend the 2009 10.7 Renewables Obligation (RO) by at least 10 years, from 2027 to 2037. The RO 2008 10.5 requires licensed electricity suppliers 2007 10.0 to source a specific and annually increasing percentage of the electricity they supply 2006 10.0 from renewable sources and provides the 2005 9.9 necessary financial incentive, through a system of trade-able Renewable Obligation Certificates (ROCs) which SSE owns 10.7GW of electricity generation capacity, supplement the market price of the including its share of joint ventures and associates. electricity, to encourage deployment of This comprises around: 4,500MW of gas- and oil-fired renewable energy in the UK. Its extension, therefore, represents a positive long-term capacity; 4,000MW of coal-fired and biomass capacity; signal in favour of future investment. and 2,200MW of renewable energy capacity. REVIEW BUSINESS The Energy Act 2008 enabled the introduction of ‘banding’ of the RO to allow differentiated levels of support for different renewable energy technologies. From 1 April 2009, electricity from Emissions of carbon dioxide are believed commitment, they can be declared as qualifying hydro electric schemes and to contribute around 70% of the potential leaders’. CDP said 90% of FTSE 100 onshore wind farms continues to receive global warming of anthropogenic emissions companies answered its request for 1.0 ROC per MWh; from offshore wind of greenhouse gases. SSE’s target is to information. In 2008 SSE maintained farms it is now 1.5 ROCs per MWh. reduce the amount of carbon dioxide per its position in the CDLI for the second kilowatt-hour of electricity generated at consecutive year. Later that month, the UK government plant in which it has an ownership or announced a banding review with the contractual interest by 50%, between 2006, Renewable Energy – Overview intention of increasing ROCs from 1.5 the first full year after it acquired coal- Tackling climate change and securing per MWh to 2.0 for offshore wind projects fired power stations, when it was around future supplies remain the two goals meeting specified completion criteria if 600g/kWh, and 2020. On this basis, its of energy policy in the UK, Ireland and they place new orders in 2009-10, and carbon intensity in 2008/09 was 491g/kWh. the EU. Against this background, the EU then 1.75 in 2010-11. Renewable Energy Directive imposes The decisions SSE takes and the legally-binding targets on EU Member SSE has sought, and received, from the investments it makes are influenced by States, specifying the proportion of all UK government clear assurances that any this target. For example, since 2005/06, it energy consumption that must be met changes to banding, if implemented after has invested over £65m in carbon dioxide by renewable energy sources by 2020. the forthcoming review, will not have a efficiency improvements, or to facilitate The national target for the UK is 15% negative economic impact on any existing the burning of carbon neutral fuels such (compared with under 2% in 2007) and renewable energy developments. It is as biomass and tall oil, at its coal-fired for the Republic of Ireland it is 16%. In also engaged in discussions with the power stations. More fundamentally, practice, this is likely to mean that over UK government as to how any change to SSE’s extensive programme of investment one third of the countries’ electricity banding for offshore wind would strengthen in energy from renewable sources, requirements will have to be met from the investment climate for that particular including the decision in May 2008 to renewable sources. technology. It is particularly concerned to proceed with the construction of the ensure that previous investment decisions Greater Gabbard offshore wind farm, In its response to the UK government’s in offshore wind are not unfairly treated demonstrates its financial commitment 2008 consultation on its strategy for compared with those projects whose to a lower carbon future. achieving the target, SSE said: ‘The scale construction was delayed. of the challenge and the timetable for During 2008, SSE participated in the Carbon delivery demand early and sustained In the Republic of Ireland, the Renewable Disclosure Project (CDP), which states it is action to address critical areas. This Energy Feed In Tariff (REFIT) scheme is the world’s largest investor coalition. It said: includes resolving rapidly the current used to support renewable energy by ‘The responses from companies to CDP’s barriers, such as planning, grid access providing a guaranteed price for output annual requests for corporate data provide and infrastructure provision.’ In other and a 15% rebate (subject to a cap) on investors with vital information regarding words, the UK and other EU countries suppliers’ purchase of REFIT energy. the current and prospective impact of have to demonstrate sustained climate change on their portfolios.’ The commitment and consistent action SSE has just over 2,200MW of operating Carbon Disclosure Leadership Index (CDLI) to translate the very ambitious goals renewable energy capacity in the UK includes companies that show a ‘strong for 2020 into reality. The UK’s goals for and Ireland, comprising hydro electric organisational commitment to climate 2020 also include a 34% reduction in schemes (including pumped storage), change strategy – and because of this greenhouse gas emissions (compared wind farms and a dedicated biomass/­ Scottish and Southern Energy 34 Annual Report 2009 Generation (continued)

facility at Slough, an increase of almost 1,650GWh qualified for ROCs, compared Development in Scotland, which argued that 200MW during the year. Of this, almost with just over 1,700GWh in the previous there are still over 600MW of ‘financially 900MW qualifies for ROCs (excluding year. Assuming average ‘run off’ of water viable’ hydro electric schemes to exploit, biomass). Looking ahead, it has set itself into SSE’s reservoirs during the year, especially smaller and micro schemes. SSE the target of owning and operating the ROC-qualifying output from hydro has consent to develop new ‘run-of-river’ 4,000MW of renewable energy capacity generation is expected to be around hydro electric schemes near Crianlarich in the UK and Ireland by the end of 2013. 1,700GWh in 2009/10. (2.5MW) and Wester Ross (3.5MW). It is continuing to examine the scope for new The achievement of this milestone Hydro Generation – Investment hydro electric developments and in August will mean SSE is making a significant The construction of SSE’s new 100MW hydro 2008 invested £750,000 in Green Highland contribution to the achievement of the electric station, at Glendoe near Loch Ness, Renewables, in return for a 33.3% stake in 2020 targets in the UK and Ireland, and was completed two months earlier than the company, which develops small and it is making comprehensive plans to scheduled and at final capital cost of just medium-sized hydro electric schemes. build on its 2008-13 programme of over £160m. Glendoe is now SSE’s second investment in renewable energy in largest conventional hydro electric station, Hydro electric schemes which use the subsequent years. and the first large-scale station to be built impounded water to generate electricity in Scotland for over 50 years. Operationally, have an important part to play in meeting In addition to its clear environmental its principal feature is that it is able to start peak demand and also complement the benefits, renewable energy also significantly generating electricity at full capacity in just growing, but variable, amount of output reduces SSE’s exposure to volatile prices 30 seconds. In a year of average rainfall, from wind farms. Against this background, for fossil fuels because the fuel used to its output should be around 180GWh of SSE is submitting to Scottish Ministers an generate electricity is indigenous and free. electricity. During the final three months application for consent to develop a 60MW This is in marked contrast to fossil fuels, of 2008/09, its total output was 76GWh. pumped storage scheme at its 152MW sources of which are in decline but which Sloy power station, near Loch Lomond. will be in huge demand from economies Since the Renewables Obligation was This means that in addition to electricity around a world, in many of which the introduced in April 2002, SSE has invested produced from water collected and held population is growing fast. over £300m in refurbishing and developing in the Loch Sloy reservoir, Sloy would hydro electric schemes in Scotland, generate electricity using water pumped In addition to its focus on the UK and including Glendoe. from Loch Lomond to the reservoir. Ireland, SSE is undertaking in the same period a programme of development in The vast majority of SSE’s hydro electric In an average year, Sloy produces renewable energy in new markets in stations were built in the 1950s and early around 120GWh of electricity and adding continental Europe (principally Portugal, 1960s and are the subject of a rolling a pumped storage facility would allow Scandinavia, Italy, Germany and the programme of investment to prolong it to produce an additional 100GWh of Netherlands). their working life and improve their electricity a typical year to help meet operational efficiency. In 2008/09, peak demand. SSE currently expects Hydro Generation – Operations it totalled just over £20m. that developing a pumped storage facility SSE owns and operates just over 1,450MW at Sloy will require investment of over of capacity in conventional hydro electric In September 2008, the Scottish £30m. SSE is also exploring whether other schemes, including the new Glendoe Government published a study carried potential sites could be suitable for the hydro electric scheme which became out for the Forum for Renewable Energy development of pumped storage schemes. operational in December 2008, and 300MW pumped storage. Total output from the conventional hydro Hydro Generation Output (GWh) electric schemes was 3,316GWh during 2008/09, including 76GWh from Glendoe, compared with 3,518GWh during the SSE has over 1,450MW of hydro electric capacity, previous year. As at 31 March 2009, the all in Scotland, including pumped storage. The new amount of water held in SSE’s reservoirs hydro development at Glendoe is SSE’s second largest which could be used to generate electricity and it contributed 76GWh of output in its first months was 73% of the maximum, the same as of operation. in the previous year.

In order to encourage investment in 2009 3,316 maintaining for the long-term smaller schemes, the output of refurbished hydro 2008 3,518 electric stations with capacity of up to 20MW qualifies for ROCs. SSE has just 2007 3,767 over 400MW of capacity in this category 2006 3,054 (including the new plant commissioned in the last few years at Culleig, Kingairloch 2005 3,544 and Fasnakyle). In addition, the output from all new hydro electric schemes, such as Glendoe, also qualifies for ROCs. Of the total hydro output in 2008/09, just over Scottish and Southern Energy 35 Annual Report 2009

Wind Generation – Operations As at 31 March 2009, SSE owns and When SSE entered into the agreement to acquire operates almost 700MW of onshore Airtricity, now its renewable energy development wind farm capacity in the UK and Ireland, of which 300MW is in the Republic of division, in January 2008, the combined business Ireland. Although lower wind speeds were experienced during 2008/09, total had just over 870MW of onshore wind farm capacity output from SSE’s portfolio of wind farms in operation, in construction or with consent for in the UK was 953GWh during the year, all of which was eligible for ROCs, development in the UK and Ireland. This has now compared with 389GWh in the previous year (which includes the output from the reached almost 1,700MW. Airtricity portfolio of wind farms that was generated between its acquisition by SSE on 15 February 2008 and 31 March 2008); from its wind farms in the Republic of The most advanced of these projects is some reductions and does not expect them Ireland, the output was 765GWh in the Butendiek, in respect of which SSE has to return to the market peak reached same period. On average, the turbines at entered into turbine reservation agreement during 2008 for the foreseeable future. SSE’s wind farms in the UK and Ireland with Siemens Wind Power. BUSINESS REVIEW BUSINESS achieved 96% of their maximum The principal projects within SSE’s five year availability to generate electricity. This reflects SSE’s aim to develop a programme are the Clyde wind farm and substantial portfolio of offshore wind farm the Greater Gabbard offshore wind farm. Wind Generation – Investment Overview assets in northern Europe, thus helping When SSE entered into the agreement a number of EU Member States to Wind Generation Investment – Clyde to acquire Airtricity, now its renewable achieve their legally-binding 2020 targets Clyde has consent for 152 turbines. As a energy development division, in January for renewable energy. This is because result of the tender process, SSE may seek 2008, the combined business had just over wind energy is an increasingly mature to optimise the energy yield by selecting 870MW of onshore wind farm capacity technology, capable of relatively speedy turbines which have a lower installed in operation, in construction or with deployment on a large scale, and must thus capacity than that originally envisaged consent for development in the UK and play a critical part in the achievement of but which represent the most economic Ireland. This has now reached almost the UK’s, the Republic of Ireland’s and the solution. Nevertheless, the configuration 1,700MW, including: EU’s renewable energy targets for 2020. of the selected turbines will not affect the expected annual output of over 1,000GWh. k the Clyde wind farm in southern All of this means that SSE now has: Initial site works began in April 2009 and Scotland (see below); and full construction work will begin later k the Griffin wind farm in Perthshire in k over 3,400MW of renewable energy in the summer. First commissioning which SSE acquired a majority stake capacity (onshore wind, offshore wind, is scheduled for 2011 and completion in the early part of 2009, the total hydro and dedicated biomass) in is scheduled for 2012. The construction capacity of which will depend on the operation, under construction or with cost is now expected to be around £500m. most economic turbine option but will consent in the UK and the Republic This is included within SSE’s existing be well in excess of 100MW. of Ireland (excluding Arklow in the investment plans for the period to 2013. Republic of Ireland); and The progress of the Clyde project in k over 1,400MW of offshore wind farm Wind Generation Investment – particular demonstrates that the pipeline capacity with consent for development Greater Gabbard of opportunities in renewable energy on in Europe (including Arklow). Greater Gabbard Offshore Winds Limited which the acquisition was based are now (GGOWL) is a 50:50 joint venture between being realised. Further evidence of this In addition, the proposal by Viking Energy, SSE and RWE npower renewables, which is that SSE expects to complete the the joint venture between Viking Energy acquired its 50% stake from SSE in construction of over 150MW of onshore Ltd (which is 90% owned by Shetland November 2008, to develop in the outer wind farm capacity during 2009/10. Charitable Trust) and SSE to develop Thames Estuary what is the world’s largest on Shetland’s Central Mainland a wind offshore wind farm under construction. SSE also has a 50% share of the 500MW farm with 540MW of capacity was Greater Gabbard wind farm now under submitted to Scottish Ministers in May The development of Greater Gabbard, construction in the outer Thames Estuary 2009. This takes to over 1,000MW the excluding the connection to the electricity (see below). It also has almost 1,400MW of amount of onshore wind farm capacity grid, is expected to require total investment offshore wind farm capacity with consent for which SSE has applied for consent of around £1.3bn. Onshore work on the for development. This comprises: to build in Scotland, England, Northern construction of the wind farm is now well Ireland, Italy and Sweden. under way, as is fabrication of offshore k the 280MW Butendiek offshore wind structures and turbines. Offshore work is farm planned for a site off the coast SSE remains on course to make on track to begin in the next few months, of Germany; investments of around £3bn in renewable with the first installations taking place k two offshore wind farms proposed in energy in the five years between 2008 and before the end of the financial year. It will the Dutch sector of the North Sea with 2013. A key consideration in investments be commissioned in two phases, with a total capacity of up to 610MW; and will be the prices of the wind turbines the entire construction scheduled to be k the 500MW Arklow scheme off the themselves. While these are the subject completed in 2012. On completion, the wind east coast of the Republic of Ireland. of a number of variations, SSE has seen farm will have a total capacity of around/­ Scottish and Southern Energy 36 Annual Report 2009 Generation (continued)

500MW, with 140 turbines mounted on steel monopiles, in water depths between around Electricity Generation Capacity – Onshore Wind (MW) 20 and 30 metres. It is expected to have a load factor of over 40%, based on site- specific met mast data collected since 2005, and produce around 1,900GWh of 2009 690 electricity in a typical year. SSE will take 2008 600 50% of the output. Its operations and maintenance will be carried out by SSE 2007 160 Generation, under a management services 2006 40 agreement with GGOWL. 2005 20 Although SSE is very positive about the long-term benefits of offshore wind farms, the difficulties associated with developing, operating and maintaining SSE owns and operates capacity at onshore energy assets in a marine environment wind farms in Scotland, Northern Ireland and the and the challenges associated with the Republic of Ireland. Additional wind farms are also development of offshore wind farms under construction as part of SSE’s target to have are not being under-estimated. 4,000MW of operating renewable generation capacity in the UK and Ireland by the end of 2013. Wind Generation Investment – Offshore Wind in the UK SSE expects that Greater Gabbard will prove to be the first of a series of major offshore wind farms which it develops over the next risks involved in offshore wind projects and in Portugal with a total potential capacity decade. In February 2009, it was granted to maximise the development capability. of around 400MW (gross). This was exclusivity by The Crown Estate to develop followed by the establishment of a offshore wind farms at four locations in In October 2008, SSE was one of five joint venture with an Italian wind farm Scottish territorial waters. At two of the energy companies to sign an agreement development company, Entropya, which four sites, SSE is in partnership with other on offshore wind with The Carbon Trust. has a wind farm development pipeline specialist developers. The proposed wind This marked the start of a major new in excess of 2,000MW (gross) at various farms could have a total capacity of up to research, development and demonstration stages in the authorisation process. 2,700MW, of which SSE would own 85%. initiative called the Offshore Wind Accelerator (OWA). The OWA aims to The acquisition of Airtricity has extended Their development is subject to site-specific cut the cost of energy from offshore wind the scope of SSE’s interests to continental consultations and environmental impact by at least 10% through a combination of Europe, thereby giving it development and assessments, statutory consents and reducing costs and increasing revenues for operational activity in a new geographical satisfactory completion of the Strategic the developers and operators of projects. location. That activity will remain disciplined Environmental Assessment for offshore and clearly focused on renewable energy, wind announced by the Scottish Investment Options in New Markets especially in view of developments in government in October 2008. In addition to its wind and hydro financial markets. This means investments investments in the UK and Ireland, SSE in the UK and Ireland are likely to be A month later, SSE joined forces with RWE is identifying options to invest in renewable prioritised in the first instance, followed npower renewables, Statkraft and Statoil/ energy in new markets: waste-to-energy by investments elsewhere in Europe. SSE Hydro to bid to win exclusive rights to (principally in the UK – see below); onshore does not expect to undertake any wind farm develop wind farms under the terms of and offshore wind farms in Europe developments in China in the foreseeable the Zone Development Agreements as (principally Portugal, Scandinavia, Italy, future and is planning to dispose of part of The Crown Estate’s third licence Germany and the Netherlands where Airtricity’s development portfolio there. round for UK offshore wind farms (Round there are particular opportunities for 3). The four companies are co-operating growth in renewables – see above); and Marine Energy on a single, joint bid and – should they be emerging technologies. Any investment In February 2009, SSE and Aquamarine successful – will work together on the will involve working with partners and Power, in which it has a 50% stake, development, construction and operation will largely be on an equity basis, with entered into a joint venture aimed at of Round 3 wind farms. non-recourse or project-specific debt developing sites in the UK and the Republic typically expected to account for around of Ireland capable of hosting 1,000MW of In April 2009, SSE joined forces with 75% of the total cost of the investment. marine energy capacity by 2020. The two Fluor Limited, the UK operating arm companies’ goal is to deliver marine energy of Fluor Corporation, to create another In April 2008, SSE entered into a 50:50 joint sites suitable for Aquamarine Power’s wave consortium, Seagreen Renewables, to venture with Gothia Vind, which is aiming technology, Oyster, a prototype of which bid for the exclusive rights to develop to develop around 200MW of onshore wind should be deployed at the European Marine other wind farms under Round 3 farm capacity in Sweden over the next three Energy Centre in Orkney in the summer (Airtricity and Fluor jointly developed the years. Two months later, SSE entered into of 2009. In April 2009, the Oyster device Greater Gabbard Offshore Wind Farm). two joint venture partnerships, with Riviera produced and exported electricity at Partnerships with other developers such and with Hispano Lusa SL, to further its the New and Renewable Energy Centre as this are intended by SSE to minimise plans for the development of wind farms (NaREC) near Newcastle, for the first time. Scottish and Southern Energy 37 Annual Report 2009

Biomass and Multi-fuel identified. These projects are being whereby Centrica will invest in EDF’s SSE’s plant at Slough has a current progressed through feasibility stages, nuclear business in the UK, including generating capacity of 80MW and remains with a view to applications for consent the current British Energy nuclear power the UK’s largest dedicated biomass energy being made in 2009/10. station fleet. This agreement would bind facility. During 2008/09, it produced together companies which currently 148GWh of electricity qualifying for ROCs, Emerging Technologies – SSE Ventures supply electricity and gas to over 40% compared with 33GWh during the three In February 2007, SSE set up SSE Ventures of the homes, offices and businesses in months in which it was under SSE’s (SSEV) to develop and grow its portfolio of Great Britain. As a result, its implications ownership in the previous year. Output investments in small and medium-sized for the energy supply market and for the was affected by technical issues businesses offering renewable, sustainable wholesale electricity market will require concerning the operation of one and energy efficiency-enhancing products the most detailed scrutiny by the relevant of the steam turbines at the plant. and services. In addition to the financial competition authorities. SSE believes that support offered, SSEV works in close it is likely to require detailed conditions to The acquisition of the plant at Slough in partnership with investee companies be placed on the parties directly involved January 2008 gave SSE a platform from to help their products or services make to safeguard competition. which to invest in biomass and waste-to­ progress towards full commercial viability. energy. Against this background, and in line Participation in emerging technology Generation Priorities for 2009/10 with its approach to developing a number of developments helps SSE to anticipate, and Beyond options for the site, SSE announced in March be at the forefront of, and adapt to, During 2009/10 and beyond, SSE’s key BUSINESS REVIEW BUSINESS 2009 plans for a multi-fuel combined heat the changes in energy production and objectives in Generation will be to ensure and power (CHP) facility at Ferrybridge. consumption that are likely to occur that its diverse portfolio of power stations is The proposed multi-fuel CHP facility will over the next decade. During 2008/09, well-maintained and available to generate use a range of fuel sources, which could through equity and loans, SSE’s total electricity, with the maximum flexibility include biomass, waste-derived fuels and commitments to investing reached £88m and efficiency, in response to customer wood products, to generate around 90MW and it now holds direct or indirect stakes demand and market conditions, while of electricity and to provide heat to the in a total of 24 companies. complying fully with all safety standards Ferrybridge site. It will be compliant with and environmental regulations. the Waste Incineration Directive. Nuclear Power SSE was part of a consortium, with GDF SSE will also be pursuing timely The potential for such technology should SUEZ and Iberdrola which placed bids in the investment in asset refurbishment and not be under-estimated. In December 2008, auction by the Nuclear Decommissioning replacement projects, and working to the Institution of Mechanical Engineers Authority and EDF of three potential nuclear deliver on time and on budget its projects said that the UK could generate one fifth new-build sites in the UK, that was to develop new capacity for generating of its electricity from the 300 million concluded in April 2009. The consortium electricity. Key milestones include the tonnes of waste per annum otherwise elected to maintain its financial discipline start of construction work at the Clyde and destined for landfill – much of which and did not secure any of the sites. Griffin wind farms and the start of offshore can be readily prepared to become construction work at Greater Gabbard. refuse-derived fuel (RDF). Nevertheless, SSE continues to believe that it should work with other parties In the five years between 2008 and 2013, In line with that, SSE expects to expand its to help secure the development of SSE currently expects that its investment interests in this area, including establishing new nuclear power stations, through across its entire generation portfolio will long-term relationships with a number of appropriate investment or contractual be over £4bn, including investment in companies to help deliver some sources support, in order to help maintain secure existing assets. This investment will be of fuel for its generation and its first fuel supplies of energy for customers. designed to abate the environmental contract, with Shanks, was agreed in impact of existing assets and extend 2008/09 for the Yorkshire area. Proposals As a result, it is examining a number of their working lives and to deliver new for multi-fuel plant in other parts of the opportunities for other potential sites with assets, principally in renewable energy country are also being prepared. its consortium partners. In particular, the but also – as in the case of Marchwood consortium will be focusing on the sites and Abernedd – thermal generation. All of Forth Energy nominated as part of the UK Government’s this will support security of energy supply. In June 2008, SSE and Forth Ports plc Strategic Siting Assessment, which was entered into a strategic venture to develop published for public consultation in April In addition, SSE is seeking to build up renewable energy projects around Forth 2009, which have to be sold by their a major offshore wind farm capability Ports’ sites in Scotland and England. The current owners. in northern Europe, and so successful new venture, called Forth Energy, will invest participation in The Crown Estate’s in the generation, distribution and supply Competition Issues Round 3 is a major priority. of renewable energy for export to the In April 2008, Ofgem launched an electricity network for commercial sale investigation into SSE and Scottish Power As a result, SSE will have a growing, and for consumption at Forth Ports’ sites. Limited, under section 18 of the Competition and balanced, portfolio of electricity Act 1998 and Article 82 of the EC Treaty. generation assets, with a diminishing The venture envisages projects across a SSE co-operated fully with Ofgem, which environmental impact in which its number of renewable energy technologies, concluded in January 2009 that there had exposure to fossil fuel price volatility including wind, tidal and biomass, and been no breach of the Competition Act. will be increasingly diluted. At the same related networks and infrastructure. time, SSE will actively seek to maintain Possible projects with a total installed In May 2009 EDF Group and Centrica plc optionality and diversity in the future capacity in excess of 150MW have been announced their ‘definitive agreement’ development of its generation portfolio.// Scottish and Southern Energy 38 Annual Report 2009 Supply

Much of the commentary on Ofgem’s Supply Initial Report focused on suppliers’ pricing structures with respect to Affordability, Products, Service particular segments of the market. These included: SSE supplies electricity and gas to over nine k electricity ‘in-area’ versus ‘out-of-area’ million domestic, commercial and industrial price differentials, where Ofgem’s customers within Great Britain’s competitive analysis showed that SSE has the smallest such differential; and market and to around 50,000 customers in the k pre-payment meters (PPMs), where Irish all-island market. It is the second largest SSE had already aligned its electricity charges with those for customers supplier of energy in Great Britain and supplies paying by standard credit terms and energy under the Southern Electric, SWALEC, subsequently implemented a 3% reduction in the price paid by its gas Scottish Hydro Electric, Atlantic Electric and customers who use PPMs, thus Gas and (in Ireland) Airtricity brands. reducing the average differential between them and customers paying by standard credit terms by around £25 per annum.

SSE remains very mindful of the impact

9m 1st 191k that rising fuel bills have on already hard- Customers Service ranking Homes insulated pressed households and has worked extensively to minimise their impact, including delaying for as long as tenable the introduction of price increases. This Supply Brands has again demonstrated that the best counter to upward pressures on energy prices, and the best safeguard for customers, is Great Britain’s highly­ scrutinised competitive market.

Indeed, in March 2009, the UK Department of Energy and Climate Change published Quarterly Energy Prices in the UK which said that: ‘Provisional estimates suggest that, for the period July to December Key Priorities 2008, prices for medium domestic gas k Providing value for customers’ money through fair pricing and electricity consumers, including tax, k Delivering best-in-sector service were the lowest and fifth lowest in the k Developing existing and new energy products EU 15 respectively.’ k Completing energy effi ciency programmes Energy Supply Objectives SSE’s objective is to grow its energy supply business by offering consistently Introduction That conclusion was part of Ofgem’s competitive prices over the medium term Energy supply in Great Britain experienced Initial Findings Report, following its and providing best-in-sector service and an exceptional degree of volatility and inquiry into energy supply markets in market-leading products so that it is able intense public scrutiny during 2008/09. Great Britain, using its powers under to retain and gain customers. It also aims Forward annual wholesale prices for the Enterprise Act 2002. It confirmed to broaden its relationship with these electricity peaked at almost £90 per MWh; that the fundamental structures of a customers through the provision of for gas, they peaked at 100p per therm. competitive market are in place and added-value energy-related products and Although they subsequently fell back the transition to effective competitive services relevant to them and their needs. from these peaks, wholesale prices for markets is well advanced and continuing. In other words, SSE is not building this electricity and gas remained relatively It was to be expected that Ofgem would part of its business on the premise of high. Like other suppliers, SSE procures identify a number of areas where ‘the simply selling more of its core products energy through a variety of long- and short- transition to fully effective competition of electricity and gas but on providing the term contracts. As a result, there is a time should be accelerated’. In line with that, energy and, increasingly, the related lag between rises and falls in wholesale in March 2009, it announced it was products and services people need. prices and rises and falls in the prices minded to introduce a new licence charged to domestic customers. Ofgem condition on suppliers requiring that Energy Supply Operations – said in October 2008 that it found no prices should reflect the costs to the Customer Numbers evidence that this lag is greater when companies, a principle which SSE has SSE supplies electricity and gas in Great prices are falling than when they are rising. always supported. Britain as Southern Electric, SWALEC, Scottish and Southern Energy 39 Annual Report 2009

Scottish Hydro Electric and Atlantic Supply Key Performance Indicators Electric and Gas. During 2008/09, it March 09 March 08 achieved a net gain of 600,000 energy million million supply customer accounts, taking the Domestic electricity customer accounts (GB) 5.10 4.90 total to 9.05 million. This was the seventh Domestic gas customer accounts (GB) 3.50 3.15 successive year in which SSE achieved Business electricity and gas customer sites (GB) 0.45 0.40 a net gain in energy supply customer numbers and means it has doubled its Total energy customers (GB) 9.05 8.45 total number in that period. The total Telecoms and home services customers (GB) 0.33 0.23 comprises: Total customer numbers (GB) 9.38 8.68 k 5.1 million domestic electricity Electricity customer numbers (Ireland) 0.05 0.04 customer accounts; k 3.5 million domestic gas customer accounts; and Fortunately, falls in wholesale energy Initial Findings Report, published in k 0.45 million business electricity prices which started between July and October 2008, 43% of energy accounts in and gas sites. October 2008 were sustained in to the Great Britain are settled using direct debit early part of 2009 and SSE announced and 16% are settled through PPMs, with Within the total, 2.2 million customer a reduction in its prices for domestic the balance using standard credit terms. REVIEW BUSINESS accounts are for ‘loyalty’ products such electricity and gas customers in February. energyplus Argos as , which rewards As at 31 March 2009, the total aged customers with money-off discount Future trends in energy prices for debt (ie debt that is overdue by more vouchers, and energyplus Pulse, under domestic customers will depend on what than six months) of SSE’s domestic and which customers are able to support the happens in wholesale electricity and gas small business electricity and gas British Heart Foundation (which received markets, with public policy decisions on customers was £72m, compared with £295,000 from SSE in respect of energyplus energy production and consumption also £70m in March 2008, during which period Pulse customers during 2008/09). having an impact. The competitive supply the number of customers increased by market and the comprehensive scrutiny over 7%. While improvements continue In addition, in October 2008, SSE and to which energy suppliers are subject to be made in SSE’s debtor position, Marks & Spencer (M&S) launched a represent the best means of ensuring leading indicators, such as the number new dual fuel product under the brand that prices under any scenario are as of payment reminders being issued to name M&S Energy. The product is low as possible. customers, suggest that 2009/10 will available to M&S customers exclusively pose significant debt management through M&S’ stores and website, and The long-term outlook was considered by challenges, with the volume of work by 31 March 2009 had attracted 59,000 the Business and Enterprise Committee in this area for the Customer Service customer accounts. which said in December 2008 that: ‘We division increasing significantly. continue to believe that once the global Energy Supply Operations – economy begins to recover, in the long term In March 2009, Ofgem published the Prices in Great Britain “the era of cheap energy is surely over”.’ outcome of its investigation into domestic Over the past few years, SSE has customers’ direct debits. It focused on maintained a responsible pricing policy, Energy Supply Operations – over 800 customer complaints which seeking to delay for as long as possible Payment Profiles identified the name of the supplier. Of any increases in prices and seeking to Almost 58% of SSE’s domestic electricity these, 2% were about SSE – the lowest implement as quickly as possible any and gas accounts are paid by direct debit total for any of the leading suppliers – and reductions. The application of this policy or standing order. A further 10% are paid SSE was held up as having best practice means that over 2008 as a whole, SSE’s through pay-as-you-go (or prepayment) in a number of areas. At the same time, quarterly-paying dual-fuel customers meters and the balance are on credit Ofgem identified a number of sector-wide paid an average of almost £100 (including terms and settled by cheque or other such criticisms which SSE, in line with the VAT) less for their energy than customers payment methods. According to Ofgem’s other suppliers, will have to address./­ of the largest energy supplier.

SSE increased its prices for domestic electricity and gas customers in August 2008. The upsurge in wholesale electricity Over the past few years, SSE has maintained a and gas prices experienced up to that point made delaying price rises beyond responsible pricing policy, seeking to delay for as that untenable because SSE could no longer sustain the significant losses in long as possible any increases in prices and seeking energy supply then being experienced. to implement as quickly as possible any reductions. The Business and Enterprise Committee of the UK House of Commons said in The application of this policy means that over 2008 as December 2008: ‘a reasonable level of profit by the big energy suppliers will be a a whole, SSE’s quarterly-paying dual-fuel customers paid precondition’ of the necessary investment an average of almost £100 (including VAT) less for their in new electricity generating capacity taking place. energy than customers of the largest energy supplier. Scottish and Southern Energy 40 Annual Report 2009 Supply (continued)

Energy Supply Operations – under which customers who are unable for the foreseeable future and in December Customer Service to resolve issues with their supplier can 2008 SSE completed the acquisition of It is no coincidence that SSE has achieved take them up with Consumer Direct. Barclaycard’s customer service centre seven successive years of growth in Complaints which are not resolved at Cumbernauld. energy supply while being independently within eight weeks, or which become and consistently recognised as the ‘deadlocked’, may be taken to the new The centre became fully operational in customer service benchmark for the Energy Supply Ombudsman. During January 2009 and it provides SSE with the rest of the industry. SSE believes that 2008/09, 183 ‘deadlocked’ complaints capacity to expand its customer service its proposition for customers needs to involving SSE were passed on to the operations and recruit many new skilled include service and products, as well as Ombudsman, the lowest number for people at a time when the number of price, to ensure it offers the best possible any supplier. customers has continued to grow. It will value for money. relieve some of the pressures that would Although SSE maintained its best-in­ otherwise have been felt at SSE’s existing In the latest independent Customer sector position in customer service sites and gives it a new geographic area Satisfaction Report from uSwitch.com, during 2008/09, it was a year in which from which to recruit people. published in October 2008, SSE was the environment in which its teams ranked the best energy supplier, for the operated was very different as customers Energy Supply Operations – fifth successive time. It was ranked top responded to price increases and the Energy Efficiency in seven of the 11 categories featured in increasing profile of energy efficiency As the UK Department of Energy and the Report. uSwitch.com stated: ‘SSE has with a major increase in the number of Climate Change said when launching become the customer service benchmark calls to customer service centres. In total, its consultation on a heat and energy for the rest of the industry.’ In the JD SSE’s energy supply customers made efficiency strategy in early 2009, there Power UK Electricity and Gas Customer 18 million calls to the company during needs to be a transformation in the Satisfaction Study, also published in 2008/09, an increase of around one attitudes and actions of everyone when October 2008, SSE was the top-ranked quarter on the previous year. it comes to energy efficiency. It said: supplier in both electricity and gas for ‘We need a radical shift in our use of the second successive year and, once The changing shape of customer service energy and heat in our homes.’ again, was the only supplier with a score is also illustrated by the fact that email significantly above the sector average. overtook letters to become the second Using energy more efficiently is the In addition, in the Institute of Customer most common means of communication fastest and most cost-effective means Service study completed in July 2008, SSE with the company used by SSE’s of reducing energy costs, sustaining was the top-ranked performer amongst customers. This, in turn, indicates that supplies for the long term and securing UK energy suppliers. the popularity of e-services such as reductions in emissions of carbon dioxide. paperless billing is likely to increase SSE has obligations under the Carbon In previous years, SSE also used the rapidly over the next few years, and Emissions Reduction Target (CERT) number of complaints about it sent preparing for that is one of SSE’s key scheme to deliver energy efficiency to energywatch for resolution as a key priorities over the coming years. measures to households throughout performance indicator in this area. Great Britain and in 2008/09 funded Following the Consumer, Estate Agents Nevertheless, conversations with the installation of cavity wall insulation and Redress (CEAR) Act 2007, new customers will remain the most in 87,000 homes and loft insulation in arrangements have been put in place important means of communication 104,000 homes (excluding DIY insulation). It also distributed around 16 million low energy lightbulbs. Customer Numbers – GB (million) To complement its heat and energy efficiency strategy, the UK government is also developing a Community Energy SSE is the second largest supplier in the competitive Saving Programme (CESP), which aims electricity and gas supply markets in Great Britain. It to deliver energy efficiency measures supplies energy under the Southern Electric, SWALEC, on a community basis, and is seeking to Scottish Hydro Electric and Atlantic brands. It also implement a 20% increase in suppliers’ supplies energy in the Irish all-island market. CERT obligations.

These are substantial measures, which 2009 9.05 will require the commitment of significant 2008 8.45 resources by energy suppliers, but SSE endorses the goal of securing substantial 2007 7.75 savings in energy bills and reductions in 2006 6.70 emissions of carbon dioxide, and major energy efficiency initiatives are clearly the 2005 6.10 most sustainable way of achieving this.

Energy Supply Operations – Vulnerable Customers While any type of poverty, including fuel poverty, fundamentally results from an Scottish and Southern Energy 41 Annual Report 2009

individual or household having insufficient income, SSE recognises that it has a In April 2008, SSE published its Code of Practice significant role to play in reducing its for Vulnerable Customers, following consultation customers’ energy consumption (and thus the associated costs) and a role also with consumer and voluntary organisations. At its in helping those of its customers who really struggle to pay for their basic core is SSE’s belief that any ‘social’ tariff offered energy needs. by energy suppliers is only meaningful if it is clearly In April 2008, SSE published its Code the lowest-cost tariff that they make available to of Practice for Vulnerable Customers, following consultation with consumer any type of customer on any sign-up method. and voluntary organisations. At its core is SSE’s belief that any ‘social’ tariff offered by energy suppliers is only meaningful if it is clearly the lowest-cost tariff that they of energy consumption. During 2008/09, Energy Supply Priorities in 2009/10 make available to any type of customer customers with an additional 125,000 During 2009/10, and beyond, SSE will on any sign-up method. energy accounts joined better plan, taking seek to: the total to 165,000, making it SSE’s most BUSINESS REVIEW BUSINESS SSE’s social tariff, energyplus care, successful new product ever. k retain a reputation for fair pricing conforms to this principle and currently for domestic customers; gives eligible dual-fuel customers a The core of the better plan proposition k maintain best-in-sector service, discount of just over one third compared is encouraging customers to use less including improvements in billing, call with SSE’s standard tariff, as well as other energy and thus save money. SSE is handling times and enhancements help including benefit entitlement checks examining options for developing a to e-services; and free energy efficient appliances broader proposition centred on enabling k increase further the number of and home insulation. The number of customers to take control over their customers on better plan; customer accounts benefiting from energy use and secure very significant k deliver energy efficiency improvements energyplus care increased by 77,000 reductions in their consumption. through the CERT and other to 103,000 during 2008/09. Against this background, in April 2008, programmes; it agreed to invest £1m in Onzo Limited k continue to ensure customers’ energy This fulfilled SSE’s agreement with (Onzo), in return for a 24.5% share of the accounts are well-managed; the UK government to operate schemes business. Onzo is a systems development k increase the number of customers with a total value of over £16m to help business, with specific intellectual in Great Britain; and vulnerable customers in 2008/09. Under property relating to the development k increase the number of customers this agreement, that will increase to of display devices that support smart in the Irish all-energy market. around £22m in 2009/10. metering systems. In summary, SSE aims to build on its It is SSE’s policy to do all it can to help The relationship between technology position as the energy supplier with the customers who may be having difficulties and people’s behaviour is frequently strong regional brands, best-in-sector in paying for the electricity and gas they demonstrated, as the changes effected service, fair pricing policy and range of use by offering ‘tailor-made’ payment by the launch of the iPod just eight years value-adding offers to secure an eighth arrangements that suit their needs and ago illustrates. The change to a low carbon successive year of customer growth.// their circumstances. In March 2009, economy will be challenging because of customers with almost 250,000 electricity the intangible nature of energy production, and gas accounts were taking advantage distribution and supply. That is why of these arrangements. developments which allow customers to take real control over their energy Product Development consumption are of particular significance Energy supply remains intensely in the context of energy policy goals in competitive and gaining and retaining the UK, Ireland and elsewhere. customers’ loyalty is key to long-term success. At a time of higher energy prices, Ireland better plan is at the centre of the portfolio Following the acquisitions in 2007/08 of of products and services which SSE Airtricity and CHP Supply Ltd and a year currently markets. It offers a variety of of steady growth SSE has increased its incentives to help customers use less customer base in the all-island electricity energy and earn credits as a result. The market in Ireland by 25% to 50,000, credits are then applied as a reduction including almost 10,000 in Northern to the customers’ energy bills. Ireland. While the majority of these customers are commercial, SSE began to SSE launched better plan towards the supply electricity to domestic customers end of 2007 as part of its commitment during 2008. It also now supplies gas to to work in partnership with its customers industrial and commercial customers to help them reduce their energy use in Ireland and expects to supply it to and to create a more sustainable level domestic customers later in 2009. Scottish and Southern Energy 42 Annual Report 2009 Networks

Introduction SSE owns Scottish Hydro Electric Transmission, Scottish Hydro Electric Power Network Distribution and Southern Electric Power Distribution which transmit and distribute electricity to 3.5 million businesses, offices and homes via 127,000km of overhead investment up lines and underground cables. These companies are the subject of incentive-based economic regulation by Ofgem which sets for periods of five 19% to £314.6m years the index-linked prices they can charge for the use of their electricity networks, their capital expenditure and their allowed operating expenditure, within a framework known as the Price Control. Ofgem also places specific incentives on companies to improve SSE invested £314.6m in its their efficiency and quality of service.

electricity networks during 2008/09, Overall, Ofgem seeks to strike the right taking the total over the past four balance between attracting investment in electricity and gas networks, encouraging years to over £950m. companies to operate them as efficiently as possible and ensuring that prices ultimately borne by customers are no higher than they need to be. In electricity, the current Distribution Price Control runs until 31 March 2010, and the current Transmission Price Control runs until 31 March 2012.

As at 31 March 2009, SSE’s estimate of Ofgem’s valuation of the assets of its electricity distribution and transmission businesses (the Regulated Asset Value, or RAV) was £2.9bn, based on Ofgem’s methodology, including £375m for transmission. This gives it around 12% of the total Great Britain electricity transmission and distribution RAV.

SSE also has an equity interest of 50% in, and provides corporate and management services to, Scotia Gas Networks (SGN), which owns Southern Gas Networks and Scotland Gas Networks. These companies own and operate the medium and low pressure networks which deliver gas Safety Service Efficiency Sustainability Excellence Teamwork to 5.7 million properties in their areas of the UK. They are the subject of incentive- We strive to get better and smarter and more innovative based regulation by Ofgem similar to that because we want to be the best in everything we do. which applies in electricity. 2008/09 was This means fostering a culture of innovation, in which ideas the first year of a price control for the five are valued for what they are and not for who they came from, years to 31 March 2013. through issuing Licences to Innovate. SGN estimates that the RAV of the networks it owns was around £3.6bn, based on Licences to Innovate Ofgem’s methodology, as at 31 March 2009. Issued to SSE Employees This makes it the UK’s second largest 2008/09 958 gas distribution company, with around 958 one quarter of the total Great Britain 2007/08 260 gas distribution RAV. SSE’s share of this 2006/07 99 RAV is £1.8bn which, when added to its electricity networks businesses, gives SSE Scottish and Southern Energy 43 Annual Report 2009

Networks Key Performance Indicators Networks March 09 March 08 Units of electricity Reliability, Safety, Effi ciency distributed (SEPD – TWh) 34.37 34.24 Units of electricity SSE distributes electricity to over 3.5 million distributed (SHEPD – TWh) 8.51 8.65 properties in northern Scotland and central Average number of minutes lost per customer (SEPD) 66 67 southern England via overhead lines and Average number of minutes underground cables. It also owns 50% of Scotia lost per customer (SHEPD) 75 72 Number of supply interruptions/ Gas Networks, which owns and operates the 100 customers (SEPD) 64 66 Scotland and Southern gas distribution networks. Number of supply interruptions/ 100 customers (SHEPD) 76 69 All these networks are subject to incentive- Volume of gas distributed based regulation by Ofgem. After electricity and (Southern – TWh) 114.9 109.9 Volume of gas distributed gas, telecoms is SSE’s third network business.

(Scotland – TWh) 58.6 59.4 REVIEW BUSINESS

March 09 March 08 £m £m Capital expenditure on £4.7bn 127 k 74k electricity networks 314.6 264.4 RAV Power network (km) Gas network (km) SSE share of total SGN capex/repex 191.4 189.5 Capital expenditure on telecoms 23.0 38.4 Regulated Asset Value of Energy Networks (£bn*) 2009 4.7 2008 4.5 a total RAV of £4.7bn, making it the UK’s second largest distributor of energy. 2007 4.2

Together, these lower-risk economically- 2006 4.1 regulated ‘natural monopoly’ businesses 2005 2.5 provide a financial backbone and operational focus for SSE, and balance * Includes 50% of SGN its activities in the competitive Generation and Supply markets. Key Priorities k Maintaining safe and reliable supplies of power and gas The Chief Executive of Ofgem wrote to k Effi cient delivery of investment in networks the Financial Times in June 2008 and said: k Upgrade work on Beauly-Denny transmission line ‘The fact remains that, in energy, the k Complete electricity distribution price control review with Ofgem [incentive-based] model has delivered lower prices, better service and record investment in the UK.’ At the same time, Ofgem has embarked upon a two-year of transmission operators. Member States Networks Performance Overview review of the model in the context of the will have three options for compliance in Operating profit* in Energy Networks security of supply and climate change the structuring of their energy markets. increased by 7.3%, from £544.4m to issues now prevalent in energy in the UK. The options include the Independent £584.2m, contributing 38% of SSE’s System Operator (ISO), where companies total operating profit*. This comprised: During 2008, a study by the international can retain ownership of their transmission consultancy Capgemini found that the networks although their operation is k £403.7m in electricity networks, performance of electricity distribution managed by a separate, independent body compared with £382.9m in the companies in the UK is consistently better (the ISO). An ISO model already operates previous year; and than the European average in terms of in Scotland, where SSE’s transmission k £180.5m representing SSE’s share controlling costs, operating networks network is located. of the operating profit* for SGN, and customer services. compared with £161.5m in the After electricity and gas, telecoms is SSE’s previous year. In March 2009, the Presidency of third networks business. Unlike the other the EU and Members of the European two, it is not the subject of economic SSE’s combined Telecoms business (SSE Parliament agreed on new rules to regulation. It operates a national telecoms Telecom and Neos) achieved an operating increase competition in the EU’s energy network for commercial and public sector profit* of £15.5m during the year, an market by separating the management of customers which extends to around increase of 18.3% (excluding the telecoms electricity generation companies from that 10,300km throughout Great Britain. sites assets disposed of in August 2007).// Scottish and Southern Energy 44 Annual Report 2009 Networks (continued)

Electricity Networks Efficiency is one of SSE’s core values and amongst Ofgem’s explicit purposes in setting Price Controls is to keep the costs of providing secure and reliable networks Objectives The amount of electricity transmitted as low as possible. An initial assessment of operational and distributed through SSE’s networks cost efficiency analysis published by Ofgem in May 2009 and the amount of gas distributed through SGN’s networks is largely suggests that SSE continues to be the most efficient determined by the weather and by customers’ demand for energy. Variations electricity distribution operator in Great Britain. in the volume of electricity distributed have an impact on SSE’s transmission and distribution networks’ revenues (although energy volume drivers have The increase in operating profit reflects the south; in Scotland, the volume been removed from the price controls changes in the price of units distributed. of electricity and gas distributed fell. for gas distribution companies). Performance in respect of both minutes lost and interruptions was ahead of the Specific local factors added to energy If, in any year, regulated energy networks targets set by Ofgem under its Quality of volumes in the south of England during companies’ revenue is greater (over Service Incentive Scheme (QSIS), which 2008/09, compared with the previous year, recovery) or lower (under recovery) than is gives financial benefits to distribution such as the opening of Terminal 5 at allowed under the relevant Price Control, network operators that deliver good Heathrow Airport and the return to service the difference is carried forward and the performance for customers. Performance- of Shoreham power station. In addition, subsequent prices the companies may based income covers a number of issues, 2008/09 was the coldest winter in the UK charge are varied. including the quality of service provided for 13 years. As a result, SSE believes that to customers and innovation. underlying consumption of energy fell SSE’s objectives in electricity networks during the year, with weather-corrected are to ensure that they are managed Scottish Hydro Electric Power energy volumes during the second half of as efficiently as possible, including Distribution and Scottish Hydro the financial year being around 5% lower maintaining tight controls over Electric Transmission than in the previous year. operational expenditure and delivering In Scottish Hydro Electric Power Distribution effectively capital expenditure, so that (SHEPD) in 2008/09: Operational Cost Efficiency the number and duration of power Efficiency is one of SSE’s core values cuts experienced by customers is kept k operating profit* increased by 6.8% and amongst Ofgem’s explicit purposes to a minimum. to £160.4m; in setting Price Controls is to keep the k electricity distributed fell by 0.14TWh costs of providing secure and reliable Through good performance in areas to 8.51TWh; networks as low as possible. An initial such as customer service and innovation k the average number of minutes of assessment of operational cost efficiency SSE seeks to earn additional incentive- lost supply per customer was 75, analysis published by Ofgem in May 2009 based revenue under the various Ofgem up from 72; suggests that SSE continues to be the schemes to encourage good performance k the number of supply interruptions per most efficient electricity distribution in these areas. Over time, its objective 100 customers was 76, up from 69; and operator in Great Britain. is to grow the RAV of the networks k performance-based additional businesses and so secure increased income of £7.6m was earned. Power Distribution Quality of Service revenue from them. Constructive According to Ofgem’s Distribution Quality engagement with the regulator, Ofgem, The increase in operating profit reflects of Service Report, published in December during the various Price Control Reviews changes in the price of units distributed 2008, covering performance in respect of is central to this objective. and increased transmission income. customer interruptions and customer Performance in respect of both minutes minutes lost, SSE’s two networks earned Southern Electric Power Distribution lost and interruptions was ahead of additional revenue of £33m in the three In Southern Electric Power Distribution Ofgem’s QSIS targets. years to March 2008 (the most recent period (SEPD) in 2008/09: for which comparative data is available), The increase in the number of supply making them the two best-performing k operating profit* increased by 4.6% interruptions in the SHEPD area reflects electricity distribution companies in Great to £243.3m; the fact that snow, accompanied by strong Britain. This reflects successful investment k electricity distributed rose by 0.13TWh winds, was a feature of the weather over in the automation of the networks and to 34.37TWh; an extended period during the winter and effective operational responses to electricity k the average number of minutes of resulted in more faults to the network. supply interruptions. lost supply per customer was 66, down from 67; Energy Volumes Electricity Network Investment k the number of supply interruptions The volume of electricity distributed and RAV Growth per 100 customers was 64, down by SSE during the year was very similar to The key responsibility of SSE’s electricity from 66; and 2007/08, and the volume of gas transported networks businesses is to maintain safe k performance-based additional income by SGN during the year rose by 4.2TWh. and reliable supplies of electricity and to of £11.8m was earned. In both cases, there were increases in restore supplies as quickly as possible in Scottish and Southern Energy 45 Annual Report 2009

the event of interruptions. The Distribution Price Control Review for 2005-10 resulted Regulatory Asset Value (£bn) in substantially increased allowances for capital expenditure to maintain and The Regulated Asset Value (RAV) improve the networks’ performance. is Ofgem’s valuation of SSE’s electricity By earning a return from this investment, and gas network assets, which comprise SSE is able to increase its revenue from one electricity transmission network, two the networks and the efficient delivery of this enhanced investment programme electricity distribution networks and a 50% was one of its priorities for 2008/09. share in two gas distribution networks. Investment is geared to renewing SSE’s networks, which were largely built in the 1950s and 1960s, and thereby reducing 2009 4.7 the number and duration of power supply interruptions. It is also geared to providing 2008 4.5 the infrastructure to accommodate customers’ demand for power. 2007 4.2

Capital expenditure in the electricity 2006 4.1 BUSINESS REVIEW BUSINESS networks during 2008/09 was £314.6m. 2005 2.5 In the first four years of the current Distribution Price Control which began in April 2005, SSE has invested £810.0m in its distribution networks (which excludes metering) and a further £148.4m in its transmission network. This represents maintained at broadly the 2008/09 level. control technologies to deliver electricity a 81.2% increase compared with the first Having published its third consultation more efficiently, are expected to play an four years of the previous Price Control, document about the Review for 2010-15 increasingly important part in enabling 2000-2004. in May 2009, Ofgem will publish its Initial the delivery of long-term targets for Proposals on each electricity distribution renewable energy and reduced emissions SSE forecasts that the total growth in company’s revenue requirements in late of carbon dioxide. the RAV of its electricity distribution and July 2009. transmission businesses, over the five The next decade is also likely to see years to March 2010, should total around SSE is the only energy company in the UK a significant uptake of electric vehicles, £500m, taking it to around £3bn in 2010. to be involved in electricity distribution, gas which some reports have suggested distribution and electricity transmission. could reach around 1.5 million in the One feature of the current Price Control It therefore participates in three price UK as early as 2020. SSE is part of two which has been widely welcomed is the control reviews in every five years, which consortia, involving BMW UK Ltd and ability to place underground electricity gives it ongoing involvement in, and Ford, which have applied to the Transport distribution lines which were previously extensive experience of, price control Strategy Board (TSB) for research and overhead, to help restore views in national issues in the UK. demonstration funding for prototype parks and areas of outstanding natural electric vehicles. If successful, these beauty. Many of these lines have been Ofgem’s two-year review of the regulatory projects will help in understanding what placed underground using the ‘mole­ regime for electricity and gas networks needs to be done to develop a viable ploughing’ technique, which buries cable (RPI-X@20), which is considering whether market for electric vehicles in the UK. with minimal environmental disruption, the current approach will continue to but at nine times the speed of conventional deliver customers reliable, well-run These are just some of the technological trenching. This technique was used, for networks with good service at reasonable developments which may have example, when 5km of overhead line prices, amid the growing investment implications for electricity networks close to the world heritage site at Avebury, challenges faced by the energy networks in the UK and in which SSE is taking which features the largest pre-historic in the future, will not report until 2010. an active interest. stone circle in Britain, was removed and Any changes arising from it will be the placed underground. subject of consultation and so work on the Future Transmission Developments Distribution Price Control Review for 2010­ Scottish Hydro Electric Transmission Distribution Price Control Review 15 is expected to be largely unaffected. (SHETL) is responsible for operating, 2010-15 and Beyond maintaining and investing in the Detailed work has begun on the As Ofgem has stated, the current regime transmission network in its area, which Distribution Price Control Review for has delivered lower costs, better service serves around 70% of the land mass of 2010-15. Ofgem’s key priorities include and record investment. Nevertheless, Scotland. As the licensed transmission encouraging electricity distribution SSE understands Ofgem’s rationale for company for the area, SSE has to ensure companies to be more responsive to the undertaking this review, and is fully there is sufficient network capacity for needs of customers and ensuring that engaged in it. those seeking to generate electricity companies provide secure and more from renewable sources. sustainable networks. SSE therefore Looking ahead, ‘intelligent’ networks, expects that annual capital expenditure featuring distributed sources of electricity The project to replace the electricity during the next Price Control will be and leading-edge communication and transmission line connecting Beauly in/­ Scottish and Southern Energy 46 Annual Report 2009 Networks (continued)

the Highlands and Denny in the Central required to meet the UK’s legally-binding Ministers’ consent to upgrade the Belt of Scotland follows on from SSE’s renewable energy targets for 2020. Beauly-Denny transmission network. licence responsibilities. The Beauly-Denny Public Inquiry, the largest in Scotland The report said: ‘The proposed Beauly- SSE will seek an acceptable outcome from since devolution, was completed in Denny rebuild is an important step in the Distribution Price Control Review for February 2008. Scottish Ministers received developing a transmission system in the 2010-15, which means being able to earn the report of the Inquiry in February 2009, north of Scotland of sufficient capacity a reasonable return on the RAV through: a and the Scottish Government said they to accommodate renewable development fair allowed return (currently 4.8% post-tax will ‘take a final decision on the proposal proposals. With this upgrade in place, real) which reflects the current economic later this year’. further reinforcement of the north of and financial environment; and scope for Scotland transmission system can be out-performance from the various It is likely that SSE’s share of the achieved by the strengthening of the incentive mechanisms. replacement line (200km of the total other elements of the system.’ distance of 220km) will require investment It is clear that encouraging electricity in excess of £300m. In other words, the consenting and companies to be more responsive to completion of the Beauly-Denny upgrade the needs of customers will be amongst The Transmission Investment for would allow other elements of the north Ofgem’s key priorities for 2010-15, and Renewable Generation mechanism of Scotland transmission ring to be SSE has in place a programme of provides funding for transmission re-conductored and re-insulated while continuous improvement initiatives in companies which are required to avoiding any need for new overhead line anticipation of this. SSE is also looking undertake work in connection with routes. This would increase the capability to the longer-term issues, such as the renewable energy that was not forecast for renewable energy capacity in the north possible impact on its distribution at the time the relevant price controls of Scotland to over 6GW, well over double networks of the deployment of a large were set. In May 2008, Ofgem announced that currently connected. number of electric vehicles and the it would allow an increase in SHETL’s development of ‘intelligent’ networks.// income to take account of costs incurred SSE’s proposal for an electricity in respect of the Beauly-Denny transmission connection between the replacement. In doing so, it noted that: Western Isles and the north west of ‘We are convinced that SHETL diverting Scotland is consistent with this featuring, Gas Networks its own internal resources to the Public for the mainland section, an underground Inquiry (above and beyond what could cable between the west coast of Sutherland reasonably be expected) has resulted in and the Beauly substation near Inverness. material cost savings that would otherwise SSE submitted to Scottish Ministers an Scotia Gas Networks (SGN) – Financial have been funded by consumers’. application for consent to construct the SGN, in which SSE holds 50% of the connection in October 2008. equity, owns and operates the Scotland In December 2008, the Scottish and the Southern gas distribution government included future electricity Electricity Distribution and Transmission networks. The networks comprise around network reinforcement to support Priorities in 2009/10 and Beyond 74,000km of gas mains, delivering gas to renewable energy development as one During 2009/10 and beyond, SSE’s first around 5.7 million industrial, commercial of 12 ‘National Developments’ in the objective in electricity distribution and and domestic customers. SSE receives second National Planning Framework. transmission will be to maintain safe 50% of the distributable earnings from Designation as National Developments and reliable supplies of power and to SGN, in line with its equity holding, and in the Framework establishes the need restore supplies as quickly as possible also provides it with corporate and for these projects in the national interest. in the event of interruptions, and so management services. The Renewable Energy Directive includes performance in terms of customer a binding commitment on EU Member minutes lost and customer interruptions SSE’s share of the adjusted operating States to ensure their electricity networks will continue to be critical. profit* of SGN was £180.5m in 2008/09, ‘accommodate the further development compared with £161.5m in the previous of electricity production from renewable Also critical will be the delivery of year. The increase is primarily due to two energy sources’. SSE’s investment plans in its electricity things: the impact of the price changes networks, which it expects to total agreed for the year to 31 March 2009 as Against this background, in March 2009, around £350m in 2009/10, and securing part of the five-year Price Control to the Electricity Networks Strategy Group, co-chaired by Ofgem and the UK Department of Energy and Climate Change, and on which SSE is represented, During 2009/10 and beyond, SSE’s first objective published Our Electricity Transmission Network: A Vision for 2020. It set out a in electricity distribution and transmission will be series of proposed reinforcements to to maintain safe and reliable supplies of power and the Great Britain transmission network, with a total value of £4.7bn, of which over to restore supplies as quickly as possible in the event £1bn would be required in the SHETL area, in two stages. The reinforcements of interruptions, and so performance in terms of would accommodate, amongst other customer minutes lost and customer interruptions things, the large amount of onshore and offshore wind farms that will be will continue to be critical. Scottish and Southern Energy 47 Annual Report 2009

March 2013, which accounted for the In March 2009, the number of lost-time majority of the year-on-year improvement; injuries in SGN was 0.13 per 100,000 hours Telecoms Networks and additional underlying operational worked, compared with 0.15 in March 2008. efficiencies achieved during the year. One of SGN’s key environmental objectives is to reduce methane emissions. During A small part of SGN’s operating profit is the year, a project began to automate Introduction to Telecoms derived from the non-regulated activities gas pressure management which, once After electricity and gas, Telecoms of its contracting, connections and commissioned, will further reduce is SSE’s third networks business. commercial services operations. these emissions. It combines SSE Telecom and Neos Networks and, following several Scotia Gas Networks – Operational Scotia Gas Networks – Investment acquisitions in recent years, now operates In March 2009, Ofgem published its Gas The five-year Gas Distribution Price a 10,300km UK-wide telecoms network, Distribution Annual Report for 2007/08. It Control, which began in April 2008, providing services for other telecoms included a ‘top-down’ regression analysis provides the opportunity for SGN to providers, companies and public sector of controllable operating costs which increase significantly investment in organisations. This includes 4,100km of showed that SGN’s two networks are first its gas distribution networks, thereby fibre optic cabling which SSE owns; the and third out of the eight networks in reinforcing their safety and reliability remainder is leased lit fibre (2,600km) and Great Britain for operating cost efficiency, and securing another significant increase microwave radio (3,600km). As a result, compared with seventh and sixth when in their RAV. By 2013, SGN estimates that SSE is the fourth largest telecoms BUSINESS REVIEW BUSINESS they were acquired by SGN in 2005. its total RAV will be around £4.6bn. network company in the UK.

One of the conditions in SGN’s licence During the first year of the new Price The business offers customers a national to operate is that it should attend at least Control, 2008/09, SGN invested £382.8m in telecoms network, and has a UK-wide sales 97% of uncontrolled gas escapes within capital expenditure and mains and services force and a competitive range of products one hour of notification. During 2008/09: replacement projects, compared with targeted at public sector organisations, 98.75% of uncontrolled gas escapes in £379.0m in the previous year. The majority medium and large enterprises, internet Scotland were attended within one hour of the mains replacement expenditure service providers, application service of notification; and in Southern, the number was incurred under the 30:30 mains providers and other licence operators. was 98.43%. replacement programme which was As a subsidiary of SSE, it is also able to started in 2002. This requires that all iron position itself as one of the UK’s most During 2008/09, SGN’s gas transportation gas mains within 30 metres of homes and financially secure telecoms network volumes were: premises must be replaced over a 30-year operators, which gives it an important period, and in 2008/09 SGN replaced over competitive advantage, especially during k 58.6TWh in Scotland, compared with 1,000km of its metallic gas mains with an economic downturn. 59.4TWh in the previous year; and modern polyethylene pipes. k 114.9TWh in Southern, compared with Telecoms Operations 109.9TWh in the previous year. Investment will continue to be a top SSE’s combined Telecoms business priority during 2009/10 and, in line with achieved an operating profit* of £15.5m Since 1 October 2008 only 3.5% of SGN’s that, SGN expects to invest over £350m during 2008/09, compared with £13.1m income is volume-related; the remaining in capital expenditure and mains and in the previous year (excluding the 96.5% is related to the maximum capacity services replacement projects. telecoms assets disposed of in August requirements of its customers. 2007). This reflected a strong sales For example, construction work is getting performance and greater success in During 2008/09, a milestone was reached under way on a 23km long, 1,200mm retaining customers. During the year, in the System Control project, when SGN diameter high-pressure gas pipeline the consolidation of the fibre optic and took over control of its gas network areas designed to maintain safe and reliable gas telecom duct assets acquired in 2007/08 in Scotland and the south of England. supplies in south east England. Increases was successfully completed. The company was the first of the three in demand for gas have led to the independent gas network companies development of this project to construct Telecoms Investment to take full operational control of its gas the pipeline between Farningham and In 2008/09, SSE undertook capital networks from National Grid. The second Hadlow in Kent. The total investment expenditure of £23.0m in respect of its phase of the project will see SGN in the project will be around £50m. telecoms networks, principally focused implement a new IT system for gas on improving network reliability and reach. control, allowing it to operate completely Scotia Gas Networks Priorities in 2009/10 independently. This implementation is and Beyond Telecoms Priorities in 2009/10 expected to be completed in 2010. SSE’s priority in gas distribution will and Beyond continue to be to provide SGN with the SSE’s priority in Telecoms in 2009/10 When SGN acquired its networks in June corporate and management services to is to continue to grow its sales, using 2005, National Grid was contracted to support its ongoing drive to operate with its now-integrated expanded nationwide provide it with services with a total value the maximum possible efficiency, building network, with its competitive range of of over £30m per annum. In the four years on the progress made in the last four products targeted at commercial and since, services have been brought within years. The successful delivery of the public sector customers. Longer term, SGN, and by the end of 2010, it is expected second phase of SGN’s gas network its ambition is to become the UK’s that SGN’s remaining service contracts ‘System Control’, and of the £50m high leading alternative telecoms network, with National Grid will total just over pressure gas pipeline project in Kent, capable of delivering a consistent level £10m per annum. are among SGN’s key priorities.// of growth.// Scottish and Southern Energy 48 Annual Report 2009 Energy-Related Services

Introduction As well as being involved in Generation, Supply and Networks, SSE also provides Operating profit an additional range of energy-related services which complement its other businesses: Contracting, Connections and Metering, including Utility Solutions; up 8.9% in Energy and Home Services; and Gas Storage. These are important services, on which customers depend, so that their increasingly complex energy requirements Contracting, can be met.// Energy-Related Services Key Performance Indicators Connections March 09 March 08 SEC order book (£m) 101 99 New electrical connections 36,000 42,800 and Metering New gas connections 7,300 8,200 Out-of-area networks in operation 47 33 Telecoms customers 217,000 165,000 Home services customers 115,000 70,000 SSE’s operating profit derived from its Gas storage customer Contracting, Connections and Metering nominations met (%) 100 100 activities grew by 8.9%, to £74.8m. SSE’s Southern Electric Contracting Contracting, Connections is one of the UK’s leading electrical and Metering and mechanical contractors.

Operating profit* in Contracting, Connections and Metering rose by 8.9%, from £68.7m to £74.8m, during 2008/09.

Introduction to Contracting SSE’s Contracting business, Southern Electric Contracting (SEC) has three main areas of activity: industrial, commercial and domestic mechanical and electrical contracting; electrical and instrumentation engineering; and public and highway lighting. Now employing 4,700 people, it is one of the largest mechanical and Safety Service Efficiency Sustainability Excellence Teamwork electrical contracting businesses in the UK. It operates from 57 regional offices We support and value our colleagues and enjoy working throughout Great Britain and also trades together as a team in an open and honest way. This means as SWALEC Contracting in Wales and working as a team to fulfil SSE’s core purpose – providing Scottish Hydro Contracting in Scotland. the energy people need in a reliable and sustainable way. Contracting Performance During 2008/09 SEC made solid progress during 2008/09, with its order book ending the year at Total Number of Employees £101m, which was slightly higher than (headcount) the year before, despite the onset of the 2009 18,795 economic recession. The order book was 18,795 supported by significant new contract wins 2008 16,892 with a number of major organisations in 2007 13,427 recent months, ranging from Network Rail to the University of Bristol. Scottish and Southern Energy 49 Annual Report 2009

A major proportion of SEC’s business is from public sector bodies and end-user Energy-Related Services client organisations with a high degree of ‘repeat’ business or long-term contracts. Dependability, Security, Innovation This puts it in a relatively good position to withstand the economic downturn. SSE provides energy and utility-related services. Nevertheless, there is clearly a risk that the business’ order book and profitability It owns and operates the UK’s largest onshore will be affected as a result of the recession. gas storage facility and is developing a second As a result, cost control and customer relationships are a particularly high such facility. Its Contracting group operates priority for SEC during 2009/10. from almost 60 regional offi ces throughout SEC remains the UK’s leading street- Great Britain. SSE Utility Solutions provides a lighting contractor, and in 2008/09 retained ‘one-stop’ approach for customers in the land four maintenance contracts with local authorities, gained three and lost one, development and construction sectors. SSE giving it a total of 24 contracts covering Home Services has over 330,000 customers. over one million lighting columns as at BUSINESS REVIEW BUSINESS 31 March 2009.

In addition, through its partnership with the asset finance division of The Royal Bank of Scotland, SEC operates street 30 325mcm 47 lighting maintenance and replacement Lighting contracts Gas storage capacity Networks projects for four local authorities in England under the Private Finance Initiative and has a further three such Energy-Related Services projects following its acquisition of Seeboard Trading Limited in 2007/08. In total, these projects cover around 300,000 street lighting columns and all have at least 20 years to run.

Contracting Priorities in 2009/10 and Beyond The first priority for SEC in 2009/10 is to ensure that it delivers a high standard of service to all customers in all of the sectors in which it operates. In an Key Priorities economic downturn, it is important to k Development of additional gas storage capacity maximise business opportunities with k High service standards to maximise ‘repeat’ contracting business existing customers, and a top quality level k Building up ‘one stop’ approach to utility provision of service is fundamental to that. This, k Continued expansion of Home Services in turn, should enable SEC to consolidate its position among the leading GB-wide electrical and mechanical contractors. During 2009/10 a total of eight PFI contracts will be determined and SEC is aiming to add to its existing portfolio in this area. It is also aiming to retain street lighting maintenance contracts.

Introduction to Connections, Including Utility Solutions As its name implies SSE’s Connections business provides electricity connections for homes, offices and businesses. The first priority for Contracting in 2009/10 is to Separately, during 2008/09, SSE combined ensure that it delivers a high standard of service to its existing ‘out-of-area’ embedded electricity networks (previously known all customers in all of the sectors in which it operates. as ‘National Networks’), its licensed gas transportation business (SSE Pipelines), In an economic downturn, it is important to maximise SSE Water and its commercial energy business opportunities with existing customers, and services company (ESCo) business in order to provide a one-stop solution for/­ a top quality level of service is fundamental to that. Scottish and Southern Energy 50 Annual Report 2009 Energy-Related Services (continued)

‘multi-utility’ infrastructure requirements. In line with that, the combined business, Out-of-area Networks now named SSE Utility Solutions, provides electricity, gas, water, heat and fibre-to­ SSE owns and operates electricity networks outside home solutions. its Southern Electric and Scottish Hydro Electric network operator areas. These networks are Electricity Connections throughout England, Scotland and Wales. During 2008/09, SSE completed 36,000 electrical connections, compared with 42,800 in the previous year. This was the second successive year in which the number of connections completed fell, and the recession means SSE expects a further decline in 2009/10 – although the 2009 47 financial impact of any decline should be partly offset by connection work relating 2008 33 to wind farms. 2007 24 Utility Solutions – Electricity Networks 2006 19 SSE has continued to develop its portfolio of electricity networks outside 2005 16 the Southern Electric and Scottish Hydro Electric Power Distribution areas. It now owns and manages 47 energised electricity networks outside these two areas, with development work ongoing over the long term, a more comprehensive to participate in other markets such at a number of these, and a further multi-utility solution to customers in the as health, education and defence. seven are under construction, property development and house-building including residential and commercial sectors, through being able to install, own, Utility Solutions Priorities for 2009/10 developments across England, Scotland operate and supply water and sewerage and Beyond and Wales. In total, SSE has 390MW of services alongside its existing electricity The key priority is to complete the energised networks capacity, including and gas services. combination of business activities under 3MW currently under construction. the SSE Utility Solutions name and develop Nevertheless, a reduction in new An ‘inset’ appointment is the route by the comprehensive package of services development activity in the UK economy which one company replaces another available to customers, all with the is clearly evident and this will have an as the appointed water and/or sewerage objective of creating a profitable business impact on SSE’s shorter-term growth company for a specified area. SSE Water with activities throughout the UK. ambitions in this area, although its was granted its first inset appointment market share has been increasing in October 2007 to become the water Introduction to Metering and it expects this to continue. and sewerage provider to a housing SSE’s Metering business provides development near Salisbury. In March services to most electricity suppliers Utility Solutions – Gas Pipelines 2009, Ofwat varied the inset appointment with customers in central southern SSE is also a licensed gas transporter of SSE Water, allowing it to serve a large England and the north of Scotland and installs, owns and operates gas development consisting of houses and and has undertaken a programme of mains and services on new housing and commercial premises in south Wales, in-sourcing of meter reading operations commercial developments throughout the at Llanilid. and meter operator work in other parts of UK. Although at a slower rate than in the UK. It supplies, installs and maintains previous years, the total number of new Utility Solutions – Energy Services domestic meters and carries out metering premises connected to its gas networks SSE provides site-wide energy work in the commercial, industrial and has continued to grow, and during infrastructure for industrial, commercial, generation sectors. It also offers data 2008/09, it connected a further 7,300 public sector and domestic customers. collection services to the domestic and premises, taking the total number of Utility Solutions currently operates and SME sectors. connections to more than 60,000. This is maintains commercial and domestic despite an increasing number of building heating along with a 4.5MW Combined Metering Performance During 2008/09 sites being mothballed, and building Heat and Power (CHP) facility at In total, SSE owns 3.76 million meters and projects being deferred, which means Woolwich, and it is developing biomass, changes around 280,000 meters each year the number of gas connections completed heat pump and wind energy solutions as they reach the end of their useful life or in 2009/10 is likely to be lower than in the for communities and commercial to meet customers’ requests for changed previous year. enterprises (most of customers’ CHP functionality. During 2008/09, it collected assets are now managed within SSE’s around 6.4 million electricity readings Utility Solutions – Water Generation and Supply business). and 2.6 million gas readings, up from SSE Water (SSEW) is the first new The impact of the economic slowdown 5.8 million and 2.3 million respectively company to offer both water and on the UK’s construction sector means in the previous year. sewerage services since privatisation that projects to develop new residential in England and Wales in 1989, and its CHP schemes are fewer than was the This increase partly reflects the fact that, establishment will enable SSE to provide, case a year ago and SSE is now seeking over the past two years, SSE has in-sourced Scottish and Southern Energy 51 Annual Report 2009

meter reading and meter operations work relating to its own customers in a number ‘Smart’ metering is an emerging system that enables of parts of Great Britain. This process has the quantity and value of electricity and gas used by so far taken the total number of people employed in the Metering business to the customer to be continuously monitored and allows over 1,000 as at March 2009 and means SSE is able to read over 70% of meters information about its use and cost to be available to relating to its customers’ electricity and the customer and exchanged with the supplier, through gas accounts. two-way electronic communications. This programme of in-sourcing is continuing, so that by the end of 2009/10, SSE expects to be undertaking meter reading work in all but three of the SSE strongly supports smart meters, of a reorganisation of SSE’s Home Services former electricity supply regions in and the opportunity they provide to help businesses, including appliance retailing. Great Britain and meter operator work customers cut their energy consumption, in all but four. while reducing the number of service-based Energy and Home Services Performance tasks which are largely administrative and During 2008/09 An accurately-read meter is the reactive in nature, and replacing them with SSE’s gas boiler, central heating and wiring BUSINESS REVIEW BUSINESS cornerstone of good service in energy more substantive energy advice, products protection service (shield) is now in its third supply. This programme of in-sourcing and services. They have the potential to year of operation and at 31 March 2009 had delivers significant savings against help transform the relationship between 115,000 customers, an increase of 45,000 contractor costs and supports the energy customers and their energy supplier. on the previous year. The service now covers supply brands by delivering improved 43 postcode areas, enabling 65% of SSE’s customer service, partly through the Metering Priorities in 2009/10 and Beyond existing energy customers to benefit from it. face-to-face contact that takes place For Metering, the key priority is the between SSE and its customers and successful progress of in-sourcing The talk telecoms package, under which partly through the delivery of a more of work in various parts of Great Britain, telephone line rental and calls services reliable meter reading service. At the in line with SSE’s long-term objective are supplied, now has 217,000 customers, same time, it provides a foundation from of building a national metering business, an increase of 52,000 on the previous year. which SSE will be able to deploy other and maximising the number of bills issued In March 2009, SSE also launched a new energy-related services and products to customers on the basis of an actual – broadband service under which customers as customers increasingly seek help as opposed to estimated – meter reading. are offered unlimited high-speed wireless and advice to reduce their consumption It is also important that SSE’s participation broadband, supported by a three-year of electricity and gas. in the Energy Demand Reduction Project partnership agreed with BT Wholesale. continues to be successful, with the Smart Metering lessons learned from it being used to Sales of electrical and gas appliances ‘Smart’ metering is an emerging system support a full roll-out of smart meters have struggled in the light of the recession that enables the quantity and value of throughout the country.// and in line with the downturn in sales electricity and gas used by the customer experienced across the retail sector, to be continuously monitored and allows and this prompted a reorganisation information about its use and cost to be of SSE’s activities in this area. available to the customer and exchanged Energy and Home Services with the supplier, through two-way Higher energy prices reached in 2008/09 electronic communications. had the effect of renewing customers’ and communities’ interest in the potential SSE is a leading participant in the UK Introduction to Energy and Home for wind to help meet their electricity government-sponsored Energy Demand Services needs in a sustainable way. For example, Reduction Project, in which smart meters ‘Energy services’ is a frequently used after a number of public consultations, are the subject of a trial, and in 2008/09 term, which has different meanings within residents on the Orkney island of Sanday installed around 9,000 smart meters in different organisations. For SSE it means voted in favour of a joint community homes in Perthshire, Oxfordshire and products and services which complement wind project with SSE and a planning in south Wales. the supply of electricity and gas. application for a community wind turbine was granted in January 2009. The Energy Act 2008 includes powers SSE’s energy and home services team to enable the Secretary of State for offers a range of maintenance and Energy Services Priorities for 2009/10 Energy and Climate Change to make the protection services for customers’ gas and Beyond necessary arrangements to facilitate the and electrical systems and a full range SSE’s key priorities in energy services installation of smart meters throughout of gas and electrical installation services. during 2009/10 are to: Great Britain. The UK government has It also offers electricity and gas appliances said that smart meters will be rolled and telecoms products and community- k increase customer numbers; out to all domestic customers by the end focused renewable energy schemes. k develop the range of products available; of 2020 and in May 2009 embarked on a k continue to move the shield business consultation to consider the best model Adjusted profit before tax* during towards profitability; and for rolling out smart meters to 26 million 2008/09 reflects the requirements to k commence construction on the first homes in Great Britain. make a provision of £9.6m in respect community wind energy schemes.// Scottish and Southern Energy 52 Annual Report 2009 Energy-Related Services (continued)

Gas Storage At Hornsea, gas can be injected at a rate of 2mcm per day and withdrawn at a rate of 18mcm per day, which is equivalent to the requirements of around Introduction to Gas Storage It is generally recognised that the UK four million homes. The services offered at Hornsea has insufficient gas storage. This under- provide customers with a reliable source of flexibility capacity reflects the reliance it was able to place in past years on gas production with which to manage their gas supply/demand and from the North Sea. As North Sea gas declines, UK imports will continue to respond to market opportunities. increase to meet demand from domestic customers, the increasing number of gas- fired power stations and other industrial and commercial users. At the same time, except in instances of planned maintenance. Aldbrough, able to inject and deliver gas the wholesale gas market has become This enabled customers to manage their rapidly to meet fluctuations in demand increasingly volatile, with significant rises gas market risks and respond to gas and supply, will provide a valuable source in prices for gas in the UK, particularly trading opportunities. of flexibility to the UK gas market. during days of higher demand and colder-than-forecast weather. Gas Storage – Investment SSE and Statoil (UK) Ltd now expect to SSE’s joint venture with Statoil (UK) Ltd to invest a total of over £300m to complete All of this means there will be a growing develop at Aldbrough what will become the the Aldbrough phase one development, demand in the UK for more gas storage UK’s largest onshore gas storage facility with SSE owning two thirds of the facilities to help provide security of supply made further important progress during capacity and Statoil (UK) Ltd owning of gas. Such facilities therefore have a the year, but at a slower rate than originally one third. long-term value, especially if their cycle expected with the development as a whole rate (the speed at which gas can be is taking longer than was expected when Investment in gas storage in the UK will withdrawn from storage and then it started in 2004. This is the result of a benefit from the decision by HM Revenue replaced) is fast enough. series of issues, including leaching of and Customs in April 2009 to recognise caverns requiring more time than planned the purchase of cushion gas, required SSE owns and operates the UK’s largest and problems with the installation and to maintain pressure within storage onshore gas storage facility at Hornsea operation of some equipment such as caverns, as part of the capital cost of a in East Yorkshire, in which around 325 valves and compressors. development. This means it is eligible for million cubic metres (mcm) of gas can tax relief through plant and machinery be contained in a total of nine caverns and Nevertheless, the gas export capability capital allowances. with Statoil (UK) Ltd is developing another of the facility has now been successfully gas storage facility at Aldbrough. To form tested and the first 60mcm of storage SSE and Statoil (UK) Ltd have secured such caverns, salt deposits around 2km capacity has been importing and consent to increase the storage capacity underground are leached out by seawater exporting gas during the commissioning at the Aldbrough site beyond that currently which, in turn, is replaced by gas under phase and should be in commercial under development. If developed in full, pressure. Hornsea accounts for around operation in June 2009. Aldbrough will this would approximately double the 15% of the total gas storage capacity provide the first new gas storage facility amount of gas that can be stored, to well in the UK. to become available in the UK for four over 700mcm. SSE believes that there years. Capacity in another two caverns is a case for investing in additional gas At Hornsea, gas can be injected at a rate is currently expected to become available storage facility and is aiming to take of 2mcm per day and withdrawn at a rate by the end of 2009/10. a final decision on whether and how to of 18mcm per day, which is equivalent to invest in a second phase of development the requirements of around four million When fully commissioned, currently at Aldbrough during 2009/10. homes. The services offered at Hornsea expected to be in 2012, it will have the provide customers with a reliable source capacity to inject gas and store up to Gas Storage Priorities in 2009/10 of flexibility with which to manage their 370mcm in nine underground caverns. and Beyond gas supply/demand and respond to Aldbrough will be the largest onshore SSE’s priorities in Gas Storage during market opportunities. gas storage facility in the UK and have 2009/10 are to: the capacity to deliver gas to the National Gas Storage – Operations Transmission System at a rate of 40mcm k maintain its excellent record Gas Storage delivered an operating profit* per day, equivalent to the average daily of reliability at Hornsea; of £42.7m, during 2008/09, compared with consumption of eight million homes and k maximise the amount of capacity £50.9m in the previous year. The reduction the ability to have up to 30mcm of gas at Aldbrough that is available for reflects the lower prices achieved at the per day injected. commercial storage; and start of the new storage year. k make a decision on whether to As the UK becomes increasingly proceed with the Aldbrough extension. One of SSE’s priorities for 2008/09 was dependent on imported gas to meet to ensure that Hornsea maintained its growing demand from new power stations Longer-term, SSE will also continue excellent record of dependability, and during and industry, gas storage will play an to look for other opportunities to add the year it was 100% available to customers, essential role in meeting its energy needs. to its gas storage capacity.// Scottish and Southern Energy 53 Annual Report 2009 Managing Risk

Introduction of the Board are agreed must not be Risk Categories There are many definitions of ‘risk subverted for any other financial end. The risks are set out under six principal management’ and the events of 2008 Against this background, SSE believes categories, summarised below. They are: demonstrated that very high profile it has – and should be seen to have – a organisations with apparently textbook relatively risk-adverse approach, consistent k Strategic risk is defined as losses approaches to the issue can be with this fundamental financial goal. resulting from a fundamental and overwhelmed by fundamental failures long-lasting change to the business which well-documented systems and Within this model, SSE has in place a environment within which SSE processes appeared powerless to prevent. comprehensive approach for assessing and operates. Strategic risks which SSE managing risks and maintaining internal has to manage include material Ticking the right boxes is a responsible controls, such that neither the company nor changes in economic and financial thing to do, but it is no substitute for a its reputation are undermined by failures or conditions and the impact of more fundamental responsibility on the misjudgements. These are set out below. climate change. part of companies: to ensure their overall k Market risk stems from unexpected business model and strategy and culture Approach to Risk Management adverse movements in commodity is designed with risk firmly in mind. The objectives of SSE’s risk management prices and exchange rates. Market policy are to ensure that risk is: risks which SSE has to manage Limiting Value at Risk include its obligations to supply SSE’s strategy is to deliver sustained k consistently identified, measured, customers with electricity and gas. BUSINESS REVIEW BUSINESS real growth in the dividend payable to monitored and reported across all Related to this, SSE’s Risk and shareholders through the efficient operation business activities; Trading Committee is authorised of, and investment in, a balanced range of k managed in a co-ordinated way, with to take on energy market risk within regulated and non-regulated energy-related clear roles and responsibilities; and specified limits. There are also businesses. In practice, this means SSE k managed within SSE’s specified risk general market risks from the derives income and profit from businesses appetite. competitive market place which which are subject to economic regulation SSE operates in. and businesses which are not. At the Assessment of Risks k Credit risk arises from the default of a same time, those businesses have a Risks are assessed by management and contractual counter-party resulting in common core: energy. reported on in each business unit within failure to settle or deliver on liabilities. SSE. An overview of the main risks are Credit risk exists in SSE’s core In the regulated category, SSE is involved set out by the Group Audit department business due to its need to purchase in three separate activities – electricity for the Audit Committee meetings held in fuel for generating assets and as a transmission, electricity distribution and November and May of each year, and also consequence of its energy trading gas distribution. annually for the Board – most recently at activity. SSE does not deliberately seek its meeting held in March 2009, during exposure to credit risk as a means In the latter (non-regulated) category, which it reviewed principal risk categories of generating profit. SSE is involved in electricity production and the effectiveness of SSE’s system of k Financial risk covers interest rates, and in electricity and gas supply. Within internal controls. This process involves foreign exchange, liquidity or credit – in electricity production, it uses a variety an assessment of both the likelihood summary, the failure to have sufficient of sources – coal, gas, oil, biomass, wind and importance of each risk. financial resources to meet obligations and water – from which to generate power. as they fall due. The Risk and Trading Committee of the k Operational risk stems from the These businesses are complemented Board meets monthly to review operational failure of internal processes, systems by other energy-related activities such and financial risks and exposures in energy or people and from external events as contracting, connections, metering trading, generation and treasury. not included in other categories. and gas storage. Operational risk is inherent in SSE’s The policy of the Board is to ensure activities due to the relatively complex The practical effect of this is to limit both proper identification, measurement, and nature of its business processes. the extent of any single risk and the value monitoring of such risks, ensure clarity k Regulatory and legislation risk covers associated with it, and the need to limit of roles and responsibilities, and to ensure environmental, safety, regulatory and the value at risk is at the heart of SSE’s where possible that risks are covered or general legislative and public policy decision-making processes. SSE is the hedged within SSE due to the diversity changes which can affect any aspect only company listed on the London Stock of energy-related activities. of SSE’s business./­ Exchange involved in electricity and gas distribution and supply, with the associated business model which is capable of offering such balance and such a framework for limiting the value at risk. There are many definitions of ‘risk management’ and the events of 2008 demonstrated that very high profile Clarity of Financial Goal SSE’s decision-making processes, organisations with apparently textbook approaches to including its assessment and management of risks, are also supported by the clarity the issue can be overwhelmed by fundamental failures of its fundamental financial goal for which well-documented systems and processes shareholders – to deliver sustained real dividend growth – which all members appeared powerless to prevent. Scottish and Southern Energy 54 Annual Report 2009 Managing Risk (continued)

Management of Risk Categories In addition to SSE’s well-established Risk Management Model policies and procedures on internal control and risk management, including

managers’ defined responsibilities, and Strategy Risk Assessment k Culture its active and ongoing programme of audit k

reviews, designed to review internal k k

control environments in key risk areas, Limited Value at Risk k SSE has the following approaches to k managing principal risk categories:

k Strategic risks are minimised by Risk Management k SSE’s approach of operating and k investing in a balanced range of

regulated and non-regulated energy- Open and Transparent Decision-making k related businesses, thus limiting the k value at risk. The other key feature of

SSE is that it provides energy, which k k Clarity of Financial Goal k is something that is needed rather k than just wanted. k Market risks are managed through volumetric limits on commodity-related risks and through the application of a Value at Risk (VaR) model applied in the context of the underlying position and how it could change. The exposure is policies. More fundamentally, SSE A company’s culture can be a risk subject to financial limits established prioritises the development and in itself. If mistakes are harshly dealt by the Board and managed by the Risk retention of experienced employees with, they will be hidden; if arrogance is and Trading Committee. Operationally, who have operated in a wide variety tolerated within an organisation, the risk the economic risks associated with of circumstances and conditions and of poor decisions goes up. If bonuses this exposure are managed through whose risk management experience encourage sub-optimal behaviour, sub­ a selection of longer- and shorter- is used. SSE has in place insurance optimal behaviour will result. SSE, on term contracts for commodities. policies in respect of all major risks, the other hand, regards culture as a risk More fundamentally, SSE manages including operational, and these are management tool. In this context, the generation and supply activities as reviewed annually by the Board. practical application of the Teamwork a single value chain which, in itself, k Regulatory and legislation risks value within SSE means the award of is a means of managing risks. are managed by engagement with team-based bonuses and a culture of k Credit risks in relation to SSE’s regulators, government officials and openness and transparency. The Board economically-regulated businesses other key organisations to ensure reviewed the organisational culture, are managed in accordance with the risks are mitigated. and its impact on the company’s industry standards as set out by management and operations, in May Ofgem. The greatest credit risks lie Appetite For Risk 2009 and is satisfied that it is generally with the non-regulated Generation As stated above, SSE has a generally consistent with the company’s publicly- and Supply business, for which specific risk-averse approach, consistent with stated core values of Safety, Service, credit risk controls that match the risk its moderate (but nevertheless Efficiency, Sustainability, Excellence profile of those activities are applied. fundamentally important) financial goal and Teamwork. SSE does not deliberately seek of delivering sustained real growth in exposure to credit risk as a means the dividend. Within this, its approach Purpose and Risk of generating profit. in respect of regulated businesses is more As stated above, SSE’s purpose is to k Financial risks are managed through risk-averse than is the case in other provide energy, which is something the application of policies designed to activities, where SSE might consider people need. Its principal financial maintain a balance between continuity taking on additional risk where the risk goal is to deliver sustained real dividend of funding and flexibility, with debt is very well-understood and can be growth, which is moderate. In their book, maturities spread across a broad range mitigated and the potential returns are Built to Last, Jim Collins and Jerry Porras of dates and the majority of interest clearly attractive (but also credible). wrote about companies that do ‘not view rate exposure fixed. Liquidity risk business as ultimately about maximising and Going Concern is fully described Culture profitability’. That is SSE’s view of in note 29 to the Accounts. More Also central to SSE’s approach to risk sustainable business and it underpins broadly, clear authorisation levels is its core value of Teamwork, defined its approach to risk management in all are maintained and there is clear as supporting and valuing colleagues and aspects of its activities. It means current segregation of accounting duties. working together in an open and honest management meeting the needs to present k Operational risks are managed way. This doesn’t just allow but encourages stakeholders, customers, employees, through the identification of specific full discussion of the risks and rewards communities and shareholders without risks within each activity and the of any major decision – discussion which compromising the ability of future development of associated mitigation involves people because of what they know, management to meet their plans and deployment of relevant not simply who they are. stakeholders needs.// Scottish and Southern Energy 55 Annual Report 2009 Corporate Governance Report

Dear Shareholder The Framework of Corporate Governance The Board is accountable to the I am pleased to introduce our Corporate Governance Report for the year 2008/09. company’s shareholders for the good conduct of the company’s affairs. The Board’s principal objective is to ensure that the Group delivers its strategy whilst The following report sets out how the ensuring that this is carried out within a sound framework of corporate governance. company applies the principles of the The Board believes that strong corporate governance enhances shareholder value and 2006 Combined Code on Corporate this report sets out how the governance framework is implemented across the Group. Governance (‘the Code’).

Sir Kevin Smith retired at the 2008 Annual General Meeting after four years of service Throughout the year the company on the Board. He was an outstanding Director and made a valuable contribution to monitors developments in corporate the success of the company. I am pleased that we have been able to appoint Thomas governance best practice. Due regard Andersen as a non-Executive Director from 1 January 2009. Thomas has brought is also given to the policy guidelines a wealth of experience and knowledge to the Board having held a number of senior of organisations representing major appointments in the US, the UK and Denmark. His appointment complements very institutional investors. In addition, internal well the contributions of the other Directors. Following this appointment, the Board procedures are regularly reviewed and now comprises four Executive Directors and five independent non-Executive Directors, updated by the Board and the various in addition to myself as Chairman. Board Committees.

During the year Board meeting arrangements were changed. We now have Board Combined Code Compliance meetings every two months or as business dictates. Usually these are full-day meetings The Board continues to be committed preceded by dinner with senior managers and other stakeholders which has given the to ensuring that the highest standards Board more time to engage in detailed discussions on business and strategic matters. of corporate governance are maintained. We also have Board teleconference calls to update the Board on current business The Board confirms that the company performance in those months when the Board is not holding a full meeting. The year has, throughout the period under review, being reported on reflects a transition to these new arrangements which I believe are complied with all provisions set out in working well and make better use of the Directors’ time. Section 1 of the Code.

The Board continued to visit new and existing operational sites. We held our meeting in ORGANISATION AND STRUCTURE June 2008 at Ferrybridge Power Station and the Directors were updated on the flue gas

desulphurisation project and given a tour of the site. The Board meeting in March 2009 Role of the Board GOVERNANCE was also held on-site at the new operations centre near Havant on the south coast of The Board is collectively responsible for England. Our non-Executive Directors are specifically expected to devote some individual creating and sustaining shareholder value time to operational visits and to meet managers and I am pleased that they were able through the overall management of the to do so. During the year, the Directors also met a wide range of stakeholders as well Group whilst ensuring that a sound as investors and analysts. system of internal control and risk management is in place. We have completed our Board and Committee performance evaluation for the year. The evaluation process highlighted some areas where improvements could be made The Directors are fully briefed in advance but overall the conclusion was that the Board continues to function well. of Board meetings on all matters to be discussed, including regular business and Lord Smith of Kelvin financial reports, and they also receive Chairman copies of analysts’ and brokers’ reports 20 May 2009 on the company.

The Board receives detailed financial and operational information to allow it to monitor effectively the performance of the key areas of the business. It also receives regular updates on the progress and performance of investments and other major decisions made by it, together with business reports and presentations from senior management.

Memorandum and Articles of Association The powers of the Directors are determined by UK legislation and the company’s Memorandum and Articles of Association, which are available on the company’s website (www.scottish-southern.co.uk). To reflect certain changes to company law made by the Companies Act 2006, shareholders voted to adopt new Articles of Association at the 2008 Annual General Meeting (AGM). Further amendments/­ Scottish and Southern Energy 56 Annual Report 2009 Corporate Governance Report (continued)

to the Articles of Association are likely Balance of the Board Senior Independent Director to be required at the AGM in 2010, to The Board consists of four Executive Susan Rice is the Senior Independent reflect the full implementation of the Directors and five independent non- Director. She is available to meet with Companies Act 2006. Executive Directors, in addition to the major shareholders on request and she Chairman, Lord Smith of Kelvin. This gives attended the city presentation of the Board Decisions the Board a good balance of independence Group’s half-year results. In November A formal schedule of matters is specifically and experience, ensuring that no one 2008 she carried out the Chairman’s reserved to the Board for its decision, individual or group of individuals has performance evaluation, together with including: undue influence over the Board’s the other non-Executive Directors. decision-making. The composition of the k Group strategy; Board and its Committees is regularly Director Appointments k annual budget; reviewed to ensure that this balance and In accordance with the Code and the k approval of interim and final financial mix of skills and experience is maintained. company’s Articles of Association, statements; all Directors are required to stand k interim dividend payments and Non-Executive Directors for re-appointment by shareholders recommendation of final dividends; The responsibilities of the non-Executive at the first AGM following appointment k significant changes in accounting Directors include to: to the Board. Thomas Andersen, who policy and practice; was appointed as an independent non- k the Group’s corporate governance k scrutinise, measure and review the Executive Director during the year, and system of internal control; performance of management; will stand for re-appointment at the k Board and Committee membership; k assist in the development of strategy; forthcoming AGM. In addition, all k major acquisitions, mergers, disposals k review the financial information; Directors are required to retire by and capital expenditure; k ensure systems of internal control rotation and stand for re-appointment k changes in the capital and structure and risk management are appropriate at least every three years. Susan Rice of the Group; and and effective; and Gregor Alexander will stand for k approval of key policies such as safety, k manage the relationship with the re-appointment at this year’s AGM. The health and the environment. external Auditor; and Board evaluation process confirmed that k review the remuneration of and the performance of the Directors standing The schedule is reviewed regularly by the succession planning for the Board. for re-appointment continued to be Board and is published on the company’s effective and that they continue to website (www.scottish-southern.co.uk). Independence and Experience demonstrate commitment in their of non-Executive Directors respective roles. The Code states that Roles of Chairman and Chief Executive The Board has assessed the independence any length of service beyond six years The roles of the Chairman and the of the non-Executive Directors against for a non-Executive Director should be Chief Executive are separate and the criteria set out in the Code and has subject to particularly rigorous review clearly defined. concluded that they are all independent and should take into account the need in character and judgement. In line with for progressive refreshing of the Board. The Chairman is responsible for the the recommendations of the Code, at least It is confirmed that Susan Rice as Senior operation, leadership and governance half the Board, excluding the Chairman, Independent Director continues to have of the Board, ensuring that it operates are independent non-Executive Directors. the appropriate experience, knowledge effectively whilst providing appropriate Lord Smith of Kelvin was also independent and independence to remain in this role. challenge to management. when appointed Chairman. Biographical details for all the Directors are set out on pages 64 and 65. The Chairman regularly meets with The non-Executive Directors are chosen for senior managers at locations throughout their wide range of skills and experience. Attendance at Board and the Group. Although not a member, he Their continuing independence of Board Committee Meetings regularly attends the Audit Committee judgement is confirmed in the annual Non-attendance at Board and Committee meetings. External engagements Board performance evaluation process. meetings is rare, although may arise due included meetings with analysts and Non-Executive Directors serve on the to unforeseen circumstances or prior other representatives of institutional Board Committees of Audit, Nomination commitments which could not be investors, and he participated in both the and Remuneration, and one serves on rearranged. Where a Director is unable interim and annual results presentations. the Health, Safety and Environmental to attend a meeting he or she provides Biographical information on the Chairman Advisory Committee. Further details comments and feedback to either the is set out on page 64. on the membership and operation of Chairman, Committee Chairman or these Committees are set out on pages Company Secretary, who ensure that The Chief Executive is responsible for 58 to 61. the comments received are raised at the day-to-day management of Group the meeting. business and the implementation of The Chairman and non-Executive strategy and policy as agreed by the Board. Directors met during the year without The attendance of Directors at Board In discharging his responsibilities, the the Executive Directors being present. meetings and at meetings of the five Chief Executive is advised and assisted principal Board Committees during by senior management and a number of All of the non-Executive Directors 2008/09 is set out in Table A opposite. specific management committees from have been appointed for fixed terms throughout the Group’s businesses. of three years. Appointment letters are The Board is currently scheduled to hold Biographical information on the Chief available on the company’s website six meetings in 2009/10, together with Executive is set out on page 64. (www.scottish-southern.co.uk). update teleconference calls. Scottish and Southern Energy 57 Annual Report 2009

Table A – Attendance at Meetings Health, Safety and Environmental Audit Nomination Remuneration Risk and Trading Advisory Board Committee Committee Committee Committee Committee 8 meetings 3 meetings 2 meetings 3 meetings 12 meetings 3 meetings Lord Smith of Kelvin 8 – 2 3 – – Gregor Alexander 8 – – – 12 – Thomas Andersen* 3 1 – – – 1 Nick Baldwin** 7 3 2 2 – – Richard Gillingwater*** 8 3 2 3 – – Colin Hood 8 – – – – 3 Ian Marchant 8 – 2 – 9 – René Médori 8 3 2 – – – Alistair Phillips-Davies 8 – – – 12 – Susan Rice 8 – 2 3 – – Sir Kevin Smith**** 3 – – 1 – 1

* Thomas Andersen was appointed as a non-Executive Director with effect from 1 January 2009 and he attended all meetings from that date. ** Nick Baldwin was appointed to the Remuneration Committee and the Nomination Committee on 24 July 2008. *** Richard Gillingwater was appointed to the Nomination Committee on 24 July 2008. **** Sir Kevin Smith retired as a non-Executive Director on 24 July 2008 and attended all relevant meetings up to his retirement.

BOARD EFFECTIVENESS power station, and one of the Group’s members’ interests and appointments main customer service centres. was carried out by the Company Secretary. Information and Professional Development The Board considered and authorised each The Directors receive accurate, timely The Board believes that given the Directors’ reported actual and potential and clear information, with all Committee experience and skills of the Directors and conflicts of interest at the September Board

and Board papers being issued for review the briefings referred to above, any further meeting. In accordance with the company’s GOVERNANCE in advance of meetings. On joining the personal training needs can be left to the Articles of Association and relevant Board, Directors receive a comprehensive discretion of the individual. The company legislation, each Director abstained from induction course tailored to their individual makes the necessary resources available approval of their own position. The Board requirements which includes meetings should any Director request training. will continue to monitor and review potential with the Executive Directors and senior conflicts of interest on a regular basis. The management, visits to key sites, and There is an agreed procedure for Directors Nomination Committee will keep under meetings with key stakeholders. It also to be able to take independent professional review any conflict or potential conflict of covers a review of the Group’s governance, advice, if necessary, at the Group’s expense. interest situations authorised by the Board policies, structure and business including The prior approval of the Chairman is and determine whether it is appropriate details of the risks and operational issues required where such advice is likely to for such matter to remain so authorised. facing the Group. exceed £10,000. Any advice obtained shall be made available to the other members Performance Evaluation During the year, the Board and Board of the Board, if the Board so requests. The Board, the Board Committees and the Committees were kept up-to-date with individual Directors undergo an annual developments. This generally follows a All Directors have access to the advice process of performance evaluation. forward programme where briefings are and services of the Company Secretary. Senior management also participates given by Executive Directors and senior in a performance evaluation programme. management on developments in their The company continues to operate business area. Additional specialist advanced performance coaching for During the year the Chairman conducted briefings and presentations were given some of the Executive Directors and for the performance evaluation of the Board. on areas such as corporate governance other members of senior management Each Director completed a detailed and company law changes, regulation, which is designed to develop and enhance questionnaire. The questionnaires covered public affairs, health and safety, and individual and Group performance. the Board and Committee processes, their the company’s major business activities. effectiveness and where improvements Separate more informal meetings were Executive Directors’ Other Directorships could be made. Reports were produced also held with senior management. Executive Directors may be invited to on the key findings and the Chairman of become non-Executive Directors of other the Board and the Committee Chairmen The non-Executive Directors have companies. Approval may be given to accept reported these findings to the Board individual meetings, briefings and site such invitations recognising the benefit to be meeting in January 2009 for discussion. visits. The briefings focus on subjects derived to the individual and to the company. Directors also participated in detailed where they have specific knowledge Any such appointments are included in the reviews of individual performance which or expertise, such as energy trading, biographical information set out on page 64. were carried out in one-to-one meetings operational matters and customer service. with the Chairman. The process for The site visits by individual non-Executive Conflicts of Interest evaluating the Chairman was managed Directors during the year included a major During the year a full analysis of the Board by the Senior Independent Director/­ Scottish and Southern Energy 58 Annual Report 2009 Corporate Governance Report (continued)

which involved a separate meeting Governance Structure of the non-Executive Directors chaired Board of Directors by the Senior Independent Director.

The review concluded that the Board and Audit Health, Safety Nomination Remuneration Risk and its Committees were operating effectively, Committee and Environmental Committee Committee Trading continued to set clear objectives and Advisory Committee Committee focussed on the correct areas. Each of the Directors continued to make an effective contribution to the work of the Board and its Committees, was well informed and operations and internal control and Meetings and Activities in 2008/09 demonstrated full commitment to his risk management functions; and The Audit Committee had three meetings or her duties. Some further areas were k review the objectivity and during the year. identified including a renewed focus on the independence of the external Auditors future resource requirements of the Group taking into consideration the scope of During the year the Audit Committee as it continues to grow. These will be taken their work and fees paid for both audit undertook the following in order to forward in 2009. The new Board meeting and non-audit services. discharge its responsibilities: arrangements were considered to be a significant improvement. The Committee has unrestricted access Financial Statements to company documents and information k reviewed the financial statements in The Board was satisfied that the as well as to employees of the company the 2008 report and accounts and the performance evaluation process was a and the external Auditors. The Audit interim results. As part of this review the worthwhile exercise and the Directors had Committee Chairman reports the Committee received from the Auditor participated in an open and frank basis. outcome of meetings to the Board. KPMG Audit Plc a report on their audit of the annual report and accounts and BOARD COMMITTEES Membership their review of the interim results; and The members of the Audit Committee who k reviewed the annual and interim The Board has delegated authority to five held office during the year and at the date results announcements. principal Committees to carry out certain of this report are set out in Table B below. tasks as defined in each Committee’s Control Environment respective Terms of Reference. The Terms The Company Secretary is Secretary and Risk Management of Reference for all Committees are set to the Audit Committee. k received six-monthly reviews by by the Board and are reviewed regularly. Group Internal Audit setting out the The Terms of Reference are available All members of the Committee are audit programme, its progress against for inspection on the company’s website independent non-Executive Directors. the programme, the results of key (www.scottish-southern.co.uk). The audits and other significant findings, Governance Structure is detailed above In terms of the Code, at least one member the adequacy of management’s and each Committee plays a vital role in of the Committee must have recent and response and the timeliness of ensuring that high standards of corporate relevant financial experience and all resolution of actions; governance are maintained throughout Committee members are expected to k reviewed and agreed the Group the Group. Membership is determined by be financially aware. René Médori has Internal Audit Plan for the year ending the Board, on the recommendation of the considerable experience through his 31 March 2009; Nomination Committee and in consultation position as Finance Director of a major k received six-monthly reports from with each Committee Chairman. international listed company. energy trading and treasury setting out strategy, market developments, AUDIT COMMITTEE The Committee normally requests the any significant risks and the controls Finance Director, Energy Supply Director, in place to mitigate these risks; Role Head of Group Internal Audit and the k received six-monthly reviews from The Audit Committee assists the Board in external Auditors to attend its meetings. Group Internal Audit on the Internal the effective discharge of its responsibilities Senior management including the Group Control Risk Assessment setting out for financial reporting and internal control, Treasurer, Group Financial Controller, the Group Risk Map and Residual together with the procedures for the Director of Energy Portfolio Management, Risk Map; and identification, assessment and reporting Director of Corporate Affairs and Head k reviewed Post-Investment Appraisal of risks. It acts independently of the of Portfolio Support may also attend to Reports and Independent Project Executive Directors. present reports. Reviews.

In accordance with its Terms of Reference, the Committee is authorised by the Table B – Members of the Audit Committee Board to: Date of Committee Name Role appointment/resignation k ensure that the company’s financial reports represent an accurate, clear René Médori Committee Chairman and and balanced assessment of the Non-Executive Director Appointed June 2003 company’s position and prospects; Thomas Andersen Non-Executive Director Appointed January 2009 k ensure the efficiency and monitor Nick Baldwin Non-Executive Director Appointed November 2006 the effectiveness of the company’s Richard Gillingwater Non-Executive Director Appointed May 2007 Scottish and Southern Energy 59 Annual Report 2009

External Audit Process k formulation of remuneration policy NOMINATION COMMITTEE k reviewed the effectiveness of the and approval of all aspects of the overall audit process for 2008/09, Executive Directors’ remuneration, Role meeting with the Auditors and including bonuses and the granting The Nomination Committee reviews the management separately to identify of incentives under the company’s structure, composition and balance of any areas of concern in the preparation schemes; the Board and its Committees and leads of the financial statements; k ensuring that an appropriate the Board appointment process before k reviewed and agreed the terms of proportion of pay is linked to corporate making recommendations to the Board. appointment, areas of responsibility, and individual performance; and Before an appointment is made the associated duties and scope of the k review and approval of the Committee evaluates the skills, audit as set out in the engagement Chairman’s fees. knowledge and experience of the Board letter for the forthcoming year; to ensure that any new appointment k reviewed and agreed the audit fees, Membership complements these qualities. Candidates fees for non-recurring work and the The members of the Remuneration from a wide range of backgrounds are regulatory reporting fee; Committee who held office during the considered and the selection process will k reviewed key accounting and audit year and at the date of this report are generally involve interviews with a number issues; and set out in Table C below. of candidates, using the services of a k reviewed recommendations made by professional search firm specialising the Auditors in its management letter The Company Secretary is Secretary in board level recruitment. and the adequacy of management’s to the Remuneration Committee. response. The Committee also reviews succession The Committee normally requests planning and leadership needs in the Independence of Auditor the Director of People and the senior course of its work taking into account k reviewed the extent of non-audit services remuneration adviser to attend its meetings, the risks and opportunities facing the provided by the Auditors in accordance and occasionally external advisers. company, and from this identifies the with the established policy where: skills and expertise required from the – a competitive tender process is Meetings and Activities in 2008/09 Board and senior management team. required where non-audit fees exceed a The Remuneration Committee had three threshold of £30,000 for general advice meetings during the year. Membership and £75,000 for tax-related advice; The members of the Nomination

– the Committee must be satisfied Full details of Directors’ remuneration, Committee who held office during the GOVERNANCE that the work was best handled general policy and developments during year and at the date of this report are by the Auditors because of their the year are given in the Remuneration set out in Table D below. knowledge of the Group; and Report set out on pages 66 to 75. – the Committee must be satisfied that The Company Secretary is Secretary the objectivity and independence of the Evaluation to the Nomination Committee. Auditors was not affected by the work The annual evaluation was conducted k reviewed changes in the Audit team; and by the Committee of its composition, Members do not take part in discussions k recommend to the Board that the role and responsibilities, operation and about their own appointment. The Board Auditors be reappointed. effectiveness, the conclusions of which Chairman would not chair the meeting were agreed and reported to the Board when it is dealing with the appointment The non-audit work awarded during the at its meeting in January 2009. of his successor. In this case the/­ year included: k taxation advice including general Table C – Members of the Remuneration Committee consultancy, acquisitions, disposal Date of Committee and new markets; and Name Role appointment/resignation k accounting due diligence. Susan Rice Committee Chairman and Non-Executive Director Appointed November 2006 Full disclosure of the non-audit fees paid Nick Baldwin Non-Executive Director Appointed July 2008 during the year is made in note 4 to the Richard Gillingwater Non-Executive Director Appointed July 2007 Financial Statements. Lord Smith of Kelvin Board Chairman Appointed November 2006 Sir Kevin Smith Non-Executive Director Retired July 2008 Evaluation The annual evaluation was conducted Table D – Members of the Nomination Committee by the Committee of its composition, Date of Committee role and responsibilities, operation and Name Role appointment/resignation effectiveness, the conclusions of which were agreed and reported to the Board Lord Smith of Kelvin Committee and Board Chairman Appointed January 2005 at its meeting in January 2009. Thomas Andersen Non-Executive Director Appointed January 2009 Nick Baldwin Non-Executive Director Appointed July 2008 REMUNERATION COMMITTEE Richard Gillingwater Non-Executive Director Appointed July 2008 René Médori Non-Executive Director Appointed November 2006 Role Susan Rice Non-Executive Director Appointed November 2007 The principal responsibilities of the Sir Kevin Smith Non-Executive Director Retired July 2008 Remuneration Committee are: Ian Marchant Chief Executive Appointed October 2002 Scottish and Southern Energy 60 Annual Report 2009 Corporate Governance Report (continued)

meeting would be chaired by a non- Thomas Andersen, with Ian Marchant of reporting based on annual operating Executive Director elected by the attending as appropriate. The Company and capital expenditure budgets; remaining members. Secretary is Secretary to the Committee. monthly reviews against actual results; analysis of variances and evaluation Meetings and Activities in 2008/09 ACCOUNTABILITY, RISK MANAGEMENT of key performance indicators; The Nomination Committee had two AND INTERNAL CONTROL k receives regular reports from the meetings during the year. Chief Executive, the Finance Director The Board considers risk management and the other Executive Directors; and Following the retirement of Sir Kevin and the system of internal control to be k undertakes an annual evaluation Smith at the 2008 AGM, the Committee fundamental to achieving the Group’s of the Board, its Committees and recommended the appointment of strategy. individual Directors. Thomas Andersen as non-Executive Director. This appointment was made on The system of internal control is the The Audit Committee: 1 January 2009. The Terms of Reference Board’s overall responsibility. Reviewing k assists the Board in the effective of the Nomination Committee were the system and monitoring its effectiveness discharge of the responsibilities updated in July 2008. The Committee is is delegated to the Audit Committee and is for financial reporting and internal now responsible for reviewing conflicts of reviewed at least annually by the Board. control, acting independently of interest authorised by the Board. During management; the year, the Committee also reviewed The system of internal control is designed k ensures financial reports and formal Board Committee membership and senior to manage rather than eliminate the risk announcements represent an accurate, management succession planning. of failure to achieve business objectives clear and balanced assessment of the and can provide only reasonable and not Group’s position and prospects; Evaluation absolute assurance against material k reviews and ensures the effectiveness The annual evaluation was conducted misstatement and loss. of operational and internal controls, by the Committee of its composition, the reliability of the information and role and responsibilities, operation and The Board and the Audit Committee have accounting systems, and the effectiveness, the conclusions of which reviewed the effectiveness of the internal implementation of established were agreed and reported to the Board control system in accordance with the policies and procedures; at its meeting in January 2009. Code for the period from 1 April 2008 to k monitors and reviews the effectiveness the date of approval of this Annual Report. of the internal audit function through RISK AND TRADING COMMITTEE No significant failings or weaknesses have regular reports from the internal audit been identified. However, had there been, department; The Risk and Trading Committee the Board confirms that appropriate k reviews the significant risks identified comprises Alistair Phillips-Davies action would have been taken. by each business unit as well as the (Chairman), Ian Marchant, Gregor mitigating action against those risks; Alexander and senior managers from Internal control is maintained through an k maintains a close relationship with energy trading, electricity generation, organisation structure with clearly defined the external Auditors; and finance and treasury. It met 12 times responsibilities, authority levels and lines k reviews the arrangements by which during the year to review and manage of reporting. The key elements of the employees can in confidence raise the operational and financial risks and Group’s internal control process are concerns about any possible exposures in energy trading, generation, summarised below: improprieties in financial and and treasury. At each meeting, updates other matters. are provided on generation plant status, The Board: market conditions, commodity exposures, k approves the policies, procedures and The Executive Directors: counterparty credit, trading limits and framework for the maintenance of a k monitor operational and financial controls and treasury. The Assistant sound and effective system of internal performance of the Group; Company Secretary is Secretary to the control ensuring: k de velop and implement Group Risk and Trading Committee. – the provision of quality internal strategy, operational plans, policies, reporting by the Audit Committee procedures and budgets; HEALTH, SAFETY AND ENVIRONMENTAL and other Board Committees, k assess and control all Group risks; and ADVISORY COMMITTEE management and internal audit; k monitor competitive forces in each – the provision of quality reporting area of operation. The Health, Safety and Environmental from the external Auditors; Advisory Committee met three times during – compliance with the Turnbull The Risk and Trading Committee: the year and was responsible for ensuring Guidance on Internal Control; and k supports the Audit Committee and that health, safety and environmental – compliance with statutory and management in managing risks and policies had been implemented, setting regulatory obligations; exposure in energy trading, generation targets and monitoring performance, and k reviews the significant risks identified and treasury; promoting awareness of these issues by each business unit as well as the k ensures that risk exposure is managed throughout the Group. mitigating action against those risks appropriately; following review by the Audit k sets and approves risk management The Committee members are Colin Hood Committee; polices and trading strategies; (Chairman), the Group Services Director, k approves and regularly reviews and k ensures the effectiveness of the Director of Generation, the Group updates the Group’s strategy and operations and internal controls; and Safety, Health and Environmental business development; k ensures risks inherent in business Manager and non-Executive Director, k reviews performance through a system activities are understood and managed. Scottish and Southern Energy 61 Annual Report 2009

The Health, Safety and Environmental shareholders, fund managers and analysts. In addition, over 250,000 shareholders Advisory Committee: It believes that this is fundamental to chose to receive written notification k together with the Audit Committee and ensuring that the Group’s strategy is of the electronic availability of future management, ensures that the health, understood and that any questions or communications. As recognition of the safety and environmental policy issues are dealt with in a constructive way. reduced environmental impact that this statements are being adhered to; form of communication entails the k sets health, safety and environmental The Board receives reports on significant company, on behalf of shareholders, has targets for the Group; and discussions with shareholders allowing made a donation in excess of £90,000 to k monitors the performance of the Directors to form a view of the priorities and the World Wildlife Fund’s International Group against these targets. concerns of the company’s stakeholders. Forest Programme during the year. Brokers’ reports and analysts’ briefings Around 80,000 shareholders receive The Internal Audit Department: are distributed to Directors. a hard copy of the Annual Report. k works with the business units to develop and improve risk management The Chief Executive and Finance Director Other Stakeholders tools and processes in their business follow an ongoing programme of dialogue, The Board has a programme of events operations; meetings, presentations and site visits. to meet with a range of external k ensures that business risks are The Investor Relations Manager has day- stakeholders representing the public identified, managed and regularly to-day responsibility for communications sector, investment community, reviewed and that the key risks are with institutional shareholders. environmental affairs, and consumer reported to the Audit Committee interests. The purpose of these events is and Board; The Chairman attended the company’s to explain the Group’s position on a range k ensures that the business units carry interim and preliminary results of business, policy and public interest out regular reviews on their internal presentations in May 2008 and November issues and to engage in their views, controls relating to the key risks; 2008. The Senior Independent Director suggestions and any areas of concern. k monitors the effectiveness of the also attended the interim results Group’s system of internal control presentation in November 2008. More generally, working with public policy through the distribution of reports and, makers is a vital area for the company, where appropriate, action plans to As part of the induction programme, given the high profile of energy and senior managers, Directors, the Audit arrangements are made for analysts environment-related issues in the UK Committee and external Auditors; to meet with newly appointed Directors. and elsewhere. The company engages k monitors adherence to the Group’s with stakeholders in seven main ways: GOVERNANCE key policies and principles; and Private Shareholders k provides the Audit Committee and The Board continues to take account k constructive engagement with Ofgem, Board with objective assurance on of any concerns of private shareholders which is responsible for promoting the Group’s control environment. and, on its behalf, the Company Secretary competition, wherever appropriate, oversees communication with these and regulating the monopoly GOING CONCERN investors. companies which run the gas and electricity networks; After making enquiries, the Directors Annual General Meeting k ongoing dialogue with Ministers and have a reasonable expectation that the The company’s AGM gives an opportunity officials in government, including the company and the Group have adequate for the Board to communicate with devolved administrations in the UK; resources to continue in operational shareholders and provides an update k submissions to government and existence for the foreseeable future. on the performance of the Group. Parliamentary consultations and The Group expects to issue further debt in All Directors attend the AGM and inquiries; the capital markets during 2009/10 to meet shareholders are invited to ask questions k meetings with, and briefings of, its funding requirements. The Financial and to meet with the Directors and senior elected members of all parties Statements are therefore prepared on managers both before the meeting and in legislatures; a going concern basis. Further details following the conclusion of the formal k engagement with local authority of the Group’s liquidity position and going part of the meeting. elected members and officials; concern review are provided in note 29. k active participation in relevant trade At the AGM, shareholders are advised associations and bodies; and COMMUNICATION WITH SHAREHOLDERS of the proxy votes cast for each resolution k discussions and work with non­ AND MAJOR STAKEHOLDERS and a report is placed on the company’s governmental organisations and website following the meeting, in addition other relevant organisations such Disclosure Group to being announced to the London Stock as charities. An internal Disclosure Group ensures Exchange. all appropriate communications are The company’s objective is to ensure made to the London Stock Exchange and Company Communications that it is able to perform its core shareholders. Copies of all announcements Following the introduction of the purpose of providing the energy people can be accessed from the company’s Companies Act 2006 shareholders now need in a reliable and sustainable way. website (www.scottish-southern.co.uk). have a choice on how to receive their Its principal public policy goal at present company communications such as is to ensure that there is in place a policy Institutional Shareholders the Annual Report. The company has and regulatory framework which is The Board encourages and seeks to build over 370,000 shareholders, and now compatible with the delivery of the up a mutual understanding of objectives communicates with around 41,000 legally-binding EU targets for renewable between the Group and institutional of these shareholders electronically. energy in 2020.// Scottish and Southern Energy 62 Annual Report 2009 Directors’ Report

Principal Activities service contract for Gregor Alexander and funding of investment opportunities and Scottish and Southern Energy plc is a the letters of appointment for Thomas the acquisition of value-enhancing assets. holding company. Its subsidiaries are Andersen and Susan Rice are set out organised into the main businesses of: in the Remuneration Report on page 72. At the 2009 AGM the Directors will again seek shareholder authority to enable k electricity generation, transmission, The interests of the Directors in the them to issue up to a maximum of 5% distribution and supply; ordinary shares of the company at of the issued share capital. The authority, k gas storage, distribution and supply; 31 March 2009 are set out in the if approved, will remain in force until k electrical and utility contracting; Remuneration Report on page 74. the 2010 AGM. There is no present k home services, supplying a wide range intention of exercising this authority of electrical and gas appliances and Directors’ Insurance and Indemnities in the year ending 31 March 2010. The complementary products; and The Directors have the benefit of the Directors note the current institutional k telecommunications. indemnity provision contained in the shareholder guidelines not to seek to company’s Articles. The Directors of the allot more than 7.5% of the issued share Business Review company have been granted a qualifying capital, cumulatively, in any three-year The company is required to set out in third party indemnity provision which was rolling period, without prior consultation. this Directors’ Report a fair review of the in force throughout the financial year business of the Group and a description of and remains in force. The company also Substantial Shareholdings the principal risks and uncertainties facing purchased and maintained throughout At 20 May 2009, the following interest the Group (known as a ‘Business Review’). the financial year directors’ and officers’ in the issued ordinary share capital The Business Review is required to set out liability insurance in respect of itself and of the company has been disclosed a balanced and comprehensive analysis for its Directors and Officers. in accordance with the requirements of the development and performance of of the UK Listing Authority’s Disclosure the Group’s business during the financial Results and Dividends and Transparency Rules: year ended 31 March 2009 and of the The Group profit attributable to position of the Group at the end of that shareholders for the financial year Entity Number of Shares* Percentage* financial year. The information that fulfils amounted to £112.3m. The Directors Legal & General these requirements, and deemed to be recommend a final dividend of 46.2p per Group Plc 43,832,434 5% incorporated in this Directors’ Report, ordinary share which, subject to approval is contained within pages 1 to 61 of at the AGM, will be payable on 25 * At date of disclosure by relevant entity. this Annual Report. September 2009 to shareholders on the register at close of business on 21 August Since the date of disclosure to the Directors 2009. With the interim dividend of 19.8p company, the interest of the shareholder The Directors as at the date of this per ordinary share paid on 27 March 2009, listed above may have increased or report are: this makes a total dividend of 66.0p per decreased. No requirement to notify the ordinary share. company of any increase or decrease Executive would have arisen unless the holding Ian Marchant, Chief Executive Officer Share Capital moved up or down through a whole Gregor Alexander Details of the company’s authorised and number percentage level. Colin Hood issued share capital at 31 March 2009, Alistair Phillips-Davies which includes options granted under the Research and Development (R&D) Group’s employee share option schemes, R&D is fundamental to the company’s Non-Executive are set out in notes 25 and 28 to the ability to change and adapt to the Lord Smith of Kelvin, Chairman Financial Statements. challenges of the future, and in 2008/09 Thomas Andersen R&D activities were increased further, Nick Baldwin Annual General Meeting building on the work of previous years. Richard Gillingwater The 20th AGM of the company will be held These have included the creation of a René Médori on 23 July 2009 at 12 noon in the Perth corporate R&D function to work with Susan Rice Concert Hall, Mill Street, Perth PH1 5HZ. coordinators across the business. The Notice of Annual General Meeting Sir Kevin Smith retired on 24 July 2008. 2009, which contains full explanations of The company has been actively involved the business to be conducted at the AGM, through the Energy Research Partnership Thomas Andersen was appointed as is set out in the shareholder circular. in supporting alignment between the a non-Executive Director on 1 January various funding bodies such as the Carbon 2009. In accordance with the Articles of Disapplication of Pre-Emption Rights – Trust, Technology Strategy Board, and Association (Articles), he will retire from Share Placing Energy Technologies Institute. It launched office at the Annual General Meeting (AGM) At each AGM the Directors seek authority a strategic partnership with Strathclyde and will offer himself for re-appointment. from shareholders to allot shares for cash University and is exploring key relationships otherwise than pro rata to all shareholders with other universities. Susan Rice and Gregor Alexander retire up to a maximum of 5% of the issued share by rotation at the AGM and, being eligible, capital in any one year. On 7 January 2009 During 2008/09 the company invested and in accordance with the Articles, will the company issued 42 million new shares £4.4m in R&D activities which included offer themselves for re-appointment. (4.8% of the issued share capital at that studies on NOx abatement from its coal- date) through a share placing. The share fired plant, carbon capture, and bio-fuels. Biographical details of all Directors are placing was priced at 1140p per share, R&D activities in renewable generation set out on pages 64 and 65. Details of the which raised £479m, to facilitate the have included a consortium looking to Scottish and Southern Energy 63 Annual Report 2009

reduce the costs of offshore wind. The opportunities policy aims to ensure that trustees to vote on their behalf by way of Energy Demand Research Project, started all employees and job applicants are no a Form of Direction. in 2007, is providing valuable insight into less fairly treated due to age, gender, customer behaviour and alongside this sexual orientation, race, disability or The company is not aware of any a number of innovative products are other reasons not justified in law or agreements between shareholders that being developed. relevant to performing their job. The may result in restrictions on the transfer company is also committed to the of securities and/or voting rights. SSE Power Distribution has continued to continuing employment of, and the take an active role in the Ofgem Innovation arranging of appropriate training for, any The rules governing the appointment Funding Incentive for both distribution employees who become disabled during of Directors are set out in the Corporate and transmission and has commissioned the course of employment. The company Governance Report on pages 55 to 61. The projects addressing asset management, aims to ensure that employees have the company’s Articles may only be amended security of supply and active network right skills to deliver the high standards of by a special resolution at a general management. performance that are necessary to achieve meeting of shareholders. its objectives. Detailed information about Employees the company’s approach to these and The company is not aware of any The number of staff directly employed by related matters is set out in its significant agreements to which it is the Group at 31 March 2009 was 18,795. Corporate Responsibility Report 2009 party that take effect, alter or terminate (see www.scottish-southern.co.uk). upon a change of control of the company Employees are encouraged to participate following a takeover. The company is in the business of the company in a Creditor Payment Policy not aware of any contractual or other variety of ways. In support of the Board’s It is the company’s policy that payment agreements which are essential to its commitment to providing opportunities terms are agreed at the outset of a business which ought to be disclosed for employees to become shareholders, transaction and are adhered to; that bills in this Directors’ Report. the company offers Share Incentive Plans are paid in accordance with the contract; and Sharesave Schemes which are open and that there are no alterations to payment Auditors to all eligible employees. Employee terms without prior agreement. The number Upon the recommendation of the Audit participation in these schemes is around of suppliers’ days represented by trade Committee and approval of the Board, 38% and 31% respectively. creditors was 39 days at 31 March 2009. resolutions to re-appoint KPMG Audit Plc as Auditors, and to authorise the Directors

The company recognises that progress Donations to fix their remuneration, will be proposed GOVERNANCE is made due to the professionalism, Charitable donations amounted to at the forthcoming AGM. commitment and teamwork of its £1,001,000 (2008 – £873,000). There were employees. For that reason, and to mark no payments for political purposes. Each of the Directors who held office the tenth anniversary of SSE’s formation, at the date of approval of this Directors’ all eligible employees received during Accounting Policies, Financial Report confirms that, so far as each 2008 a special award comprising an Instruments and Risk Director is aware, there is no relevant offer, free of charge, of 10 shares in the Details of the Group’s accounting audit information of which the company’s company; an online voucher worth £200 policies, together with details of financial Auditors are unaware and each Director for SSE’s retail business and an additional instruments and risk, are provided at has taken all the steps that ought to have day’s holiday. Notes 1, 2 and 29 to the Accounts. been taken in his duty as a Director to make himself or herself aware of any The company places strong emphasis Additional Information relevant audit information and to establish on employee communication and Where not provided elsewhere in the that the company’s Auditors are aware of involvement. An employee newspaper is Directors’ Report, the following provides that information. distributed to employees. Participation the information required to be disclosed and engagement is encouraged through by Section 992 of the Companies Act 2006. By Order of the Board team meetings, briefings and the intranet where employees are informed of the Each ordinary share of the company Vincent Donnelly latest company news from recent media carries one vote at general meetings Company Secretary coverage and about developments within of the company. 20 May 2009 the business. There are no restrictions on the transfer The Chief Executive regularly communicates of ordinary shares in the capital of the with employees through his blog and company other than certain restrictions receives feedback, in addition to live which may from time to time be imposed on-screen question and answer style by law (for example, insider trading law). ‘webchats’. During the year, the senior In accordance with the Listing Rules of management held a series of roadshows the Financial Services Authority, certain around the Group to present and discuss employees are required to seek the the Group’s vision, values and strategy. approval of the company to deal in its shares. The company has in place an extensive range of policies to safeguard the Employees who participate in the Share interests of its employees and potential Incentive Plans whose shares remain in employees. In particular, its equal the schemes’ trusts give directions to the Scottish and Southern Energy 64 Annual Report 2009 Directors’ Biographies and Responsibilities

René Médori Ian Marchant Lord Smith of Kelvin Audit Committee Chairman Chief Executive Chairman René joined the Board as a non-Executive Ian was appointed Chief Executive in 2002, Robert joined the Board as a non-Executive Director in 2003. He is Finance Director of having been Finance Director since 1998. He has Director in June 2003, was appointed Deputy Anglo American plc and is a non-Executive worked in the energy industry since 1992, when Chairman in November 2003 and became Director of Anglo Platinum and DB (De Beers) he joined Southern Electric. He is a member and Chairman in 2005. He is Chairman of the Weir Investments. He is Chairman of the Audit former Chairman of the UK Business Council Group plc and a non-Executive Director of 3i Committee and a member of the Nomination for Sustainable Energy, Chairman of the Scottish Group plc, Standard Bank Group Limited and Committee. Climate Change Business Delivery Group, and Aegon UK plc. He is also Chairman of Glasgow a member of Ofgem’s Environmental Advisory 2014 Ltd, Chancellor of the University of the Gregor Alexander Group and the Energy Research Partnership. West of Scotland and a member of the Council Finance Director He is also a non-Executive Director of John of Economic Advisers to the First Minister Gregor was appointed Finance Director and Wood Group plc and Maggie’s Cancer Centres. of Scotland. Robert is Chairman of the joined the Board in 2002, having previously Ian is a member of the Nomination Committee Nomination Committee and a member been Group Treasurer and Tax Manager. and is Lead Director for the Environment and of the Remuneration Committee. He has worked in the energy industry Corporate Responsibility. since 1990, when he joined Scottish Hydro Richard Gillingwater Electric. Gregor is a Director of Scotia Gas Colin Hood Non-Executive Director Networks Limited and is former Chairman Chief Operating Offi cer Richard joined the Board as a non-Executive of the Scottish Finance Directors’ Group. Colin was appointed Chief Operating Officer in Director in 2007. He is Dean of the Cass 2002, having joined the Board as Power Systems Business School and is non-Executive Chairman Alistair Phillips-Davies Director in 2001. He has worked in the energy of CDC Group plc, a non-Executive Director of Energy Supply Director industry since 1977, when he joined Scottish Debenhams plc and Tomkins plc. Richard is a Alistair was appointed Energy Supply Director Hydro Electric. He has Board level responsibility member of the Audit Committee, Remuneration and joined the Board in 2002, having previously for Generation, Power Systems, Customer Committee, and Nomination Committee. been Director Energy Trading. He has worked in Service, Human Resources, IT, Contracting the energy industry since 1997, when he joined and Telecoms. Colin is a Director and former Susan Rice CBE Southern Electric. Alistair has Board level Chairman of Scotia Gas Networks Limited, Non-Executive Director responsibility for Energy Trading, Electricity and a non-Executive Director of First Group plc Susan joined the Board as non-Executive Director Gas Supply, Energy Efficiency, Sales, Marketing and a member of the Forum for Renewable in 2003 and became Senior Independent Director and Energy Services. He chairs the Risk and Energy Developments in Scotland (FREDS). in 2007. She is Managing Director of the Lloyds Trading Committee. He is Lead Director for Health and Safety. Banking Group Scotland and Chairman and Chief Executive of Lloyds TSB Scotland plc. She is also a non-Executive Director of the Court of the Bank of England and chairs the Board of the Edinburgh International Book Festival, along Scottish and Southern Energy 65 Annual Report 2009

Statement of Directors’ Responsibilities in Respect of the Annual Report and the Financial Statements

The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRS as adopted by the EU and have elected to prepare the parent company financial statements on the same basis.

The Group and parent company financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position of the Group and the parent company and the performance for that period; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of the Act to financial statements giving a true and Members of the Board photographed fair view are references to their achieving a fair presentation. at SSE’s new operations centre in Havant, which will be formally opened late in 2009. The parent company financial statements are required by law to give a true and fair view of the state of affairs of the parent company. From left to right: René Médori, Gregor Alexander, Alistair Phillips-Davies, Ian Marchant, In preparing each of the Group and parent company financial Colin Hood, Lord Smith of Kelvin, statements, the Directors are required to: Richard Gillingwater, Susan Rice, Thomas Andersen, Nick Baldwin. k select suitable accounting policies and then apply them consistently;

k make judgements and estimates that are reasonable GOVERNANCE and prudent; k state whether they have been prepared in accordance with IFRS as adopted by the EU; and with several other organisations. Susan chairs k the Remuneration Committee and is a member prepare the financial statements on the going concern of the Nomination Committee. basis unless it is inappropriate to presume that the Group and the parent company will continue in business. Thomas Andersen Non-Executive Director The Directors are responsible for keeping proper accounting Thomas joined the Board as a non-Executive records which disclose with reasonable accuracy at any time Director in January 2009. He is Chief Executive the financial position of the parent company and enable them to of Maersk Oil, a member of the Group Executive ensure that its financial statements comply with the Companies Board AP Moller-Maersk, as well as director or Act 1985. They have a general responsibility for taking such steps chairman of a number of companies within the AP Moller-Maersk Group. He is a member of as are reasonably open to them to safeguard the assets of the the Audit Committee, Nomination Committee Group and to prevent and detect fraud and other irregularities. and of the Health, Safety and Environmental Advisory Committee. Under applicable law and regulation, the Directors are also responsible for preparing a Directors’ Report, Directors’ Nick Baldwin Remuneration Report and the Corporate Governance Statement Non-Executive Director that comply with that law and those regulations. Nick joined the Board as a non-Executive Director in 2006. Previously, he worked in The Directors are responsible for the maintenance and the energy industry, culminating in being Chief Executive of Powergen plc. Nick is integrity of the corporate and financial information included a non-Executive Director of the Nuclear on the company’s website. Legislation in the UK governing Decommissioning Authority, the Forensic the preparation and dissemination of financial statements Science Service and Sanctuary Housing Group may differ from legislation in other jurisdictions. and is Chairman of the Public Weather Service Customer Group. He is also Chairman of TreeHouse Trust. Nick is a member of the Audit Committee, Remuneration Committee and Nomination Committee. Scottish and Southern Energy 66 Annual Report 2009 Remuneration Report

Dear Shareholder

I am pleased to introduce the Remuneration Report for the year 2008/09.

The report was changed last year to make it easier to understand, with a new layout, greater detail on the operation of the Committee and on the structure of the remuneration package. These changes have been well received, and they have been further developed for the sections on Committee Business and Executive Directors’ Remuneration, with an initial report on total remuneration policy and an increased use of charts and diagrams to explain our policy.

The remuneration report is in three parts: k At a Glance This is an overview of total remuneration policy. k Remuneration Explained Our approach to total remuneration, outlining the key elements of the policy. k Remuneration in Detail These are the detailed disclosures required by the Directors’ Remuneration Report Regulations and which are audited.

Executive Directors’ remuneration is the subject of a great deal of scrutiny which has been intensified by the recent crisis in the financial markets, with even more attention paid to all aspects of reward. The Committee acknowledges this scrutiny and the need for transparency surrounding the remuneration for Executive Directors.

As always, the key is to ensure that reward is linked with corporate performance and reflects the skills and contribution of individuals to the achievement of that performance. In focusing on performance, the Committee is mindful of the need to avoid placing undue emphasis on the results from any one year, which may reflect unusual or specific factors. It is sustained performance over the medium and long term that matters.

As you will have seen from the earlier part of the Annual Report, SSE has continued to deliver growth in profit before tax and the dividend. The Executive Directors are a strong team, with a long-standing and well-regarded track record in the sector in which SSE operates, and they have again continued to perform well. As one energy analyst put it in February 2009: ‘SSE has a sector-leading management team that has consistently shown financial discipline.’

The Remuneration Committee has been well briefed on recent remuneration developments and has considered carefully the relevant benchmark market data. Taking these into account during the past year the Committee is satisfied that the current remuneration policy is sound and fit for purpose. Therefore no changes have been made to the policy.

The Committee has reviewed its approach to remuneration against best practice for any indications of misguided incentives or unacceptable risk-taking and is satisfied that there are no environmental, social or governance risks raised as a result of the reward policy. More fundamentally, SSE’s strategy is one which is designed with risk management at its heart.

As part of the Board evaluation process, the effectiveness of the Remuneration Committee was reviewed, the results of which indicate that the Committee continues to operate effectively.

Susan Rice Chairman, Remuneration Committee 20 May 2009

Remuneration Committee Meetings Number of meetings Meetings attended Susan Rice (Committee Chairman) 3 3 Lord Smith of Kelvin 3 3 Richard Gillingwater 3 3 Nick Baldwin 3 3

Scottish and Southern Energy 67 Annual Report 2009 Remuneration Report – At a Glance

What are the Principles of the SSE Remuneration Policy?

The core principles of the company’s remuneration policy are to: k attract and retain Executive Directors who are able to run the company effectively for the benefit of shareholders, customers and employees k adopt a competitive and practical approach to overall remuneration which meets the expectations of shareholders k reinforce the culture and teamwork required to deliver the long-term growth and sustainability of the business, and hence base salaries for Executive Directors are set at or below the relevant market median

What is SSE’s Total Remuneration Policy?

Summary of Total Remuneration Policy

Fixed Variable

Base Salary Short-term – Annual Long-term – 3 years

Pension – Final Salary Annual Bonus Plan maximum 100% of salary with Performance Share Plan (PSP) – 75% paid in cash and 25% deferred in shares future performance over 3 years

Benefits in Kind (BIK) – Assessed against corporate financial performance 50% linked to relative FTSE 100 TSR, 50% car, private medical and team and individual operational measures adjusted annual EPS growth RPI +3%-9%

Minimum Shareholding requirement equal to 100% Base Salary GOVERNANCE GOVERNANCE Base Salary/BIK Pension Bonus PSP

What was each Component of the Remuneration?

Target 36% 13% 18% 33% Stretch 27% 9% 26% 38%

The bar chart shows the four elements of total remuneration with each element shown as a proportion % of total remuneration. Base salary includes 1% benefits in kind – a car allowance and private medical plan. Target performance comprises annual bonus awarded at target level (ie 50% base salary) and, for the PSP, an assumption that 62.5% of shares under award will vest. Stretch performance is based on a bonus of 100% of base salary with demanding targets being met. PSP is calculated based on 150% of salary. The pension element is the average of each Executive Director’s present value of providing a single year of pension.

What was on the Remuneration Committee Agenda for 2008/09?

Meeting Regular standing items Other agenda items May Approval of: Performance Share Plan New Awards; Update on UK current and future remuneration Performance Share Plan Vesting Awards; Annual governance and remuneration trends. Bonus Awards; Directors’ Remuneration Report Review of Performance Share Plan targets. November Executive Directors’ and Chairman’s remuneration review. Review of Performance Share Plan TSR FTSE 100 Update on UK Executive Director market remuneration trends. constituent group. Review of SSE Group-wide proposed salary increases. Remuneration Governance update. Review of Committee effectiveness March Establishment of Bonus performance targets. Initial review of market comparison companies for remuneration benchmarking. Market update on Performance Share Plan usage. Report on Dilution effects of Share Placing. Remuneration Governance and Trends update. Scottish and Southern Energy 68 Annual Report 2009 Remuneration Report – Remuneration Explained

Introduction group pay and performance. The This has been achieved by providing The following is the report of the Board of Company Secretary, Vincent Donnelly, remuneration consisting of basic salary Directors in compliance with the Directors’ provided information to the Committee and benefits including participation in Remuneration Report Regulations 2002. on developments in corporate governance a pension scheme, together with an The report sets out the company’s policy guidelines as they affect the Remuneration Annual Bonus Scheme (some of which is on Executive Directors’ remuneration for Committee. During the year the Committee compulsorily deferred) and a Performance the year ended 31 March 2009 and, so far received advice and views from Towers Share Plan. The Annual Bonus Scheme as is reasonable, for subsequent years. Perrin and from Merrill Lynch, on relevant requires the achievement of demanding Any changes in policy for years after 2009 aspects of remuneration policy. Both Towers performance targets against the will be described in future Remuneration Perrin and Merrill Lynch were appointed by company’s core values of safety, service, Reports which will continue to be subject the company on behalf of the Committee. efficiency, sustainability, excellence and to shareholder approval. teamwork. The Performance Share Plan During the year, the committee meetings has two challenging performance criteria covered the following topics as indicated firstly Total Shareholder Return (TSR) in the chart on the previous page: measured against the FTSE 100 and The Role of the secondly Earnings Per Share (EPS) Remuneration Committee k review of Total Remuneration Policy Growth in excess of RPI. for Executive Directors; k Executive Directors’ and Chairman’s BENCHMARKING TOTAL REMUNERATION salary review; The Remuneration Committee’s members k SSE company Remuneration Policy; The Executive Directors’ total remuneration are Susan Rice, who chairs the Committee, k Bonus target setting and awards; policy is to remain below median of FTSE Nick Baldwin, Richard Gillingwater and k awards under the Performance 100 and FTSE 50. This demonstrates SSE’s Lord Smith of Kelvin. Biographical details Share Plan; long-standing commitment to manage costs of the current Committee members are k the operation of the Performance Share effectively to promote financial returns for given on pages 64 and 65. The Committee Plan, and its performance criteria; and shareholders. Further it reflects a culture met on three occasions, further details on k review of the Remuneration Report. in which Executive Directors and Senior the meetings and the agenda are contained Managers are motivated by building the in the schedule on page 67. In addition to The Board as a whole reviews the fees company for the future. This is why long- the formal meetings, informal consultation of the non-Executive Directors, whilst term growth and sustainability of the takes place outwith Remuneration ensuring that no Director is involved business are of such importance when Committee meetings. in decisions on their own pay. determining remuneration policy.

Under its Terms of Reference (published in The Remuneration Committee’s In addition to corporate and individual the Corporate Governance section of the SSE composition, responsibilities and performance, the Committee takes website at www.scottish-southern.co.uk) operation comply with Section B of the account of total remuneration in the Committee is responsible for: Corporate Governance Code. In forming companies that are of similar size remuneration policy, the Committee principally in the FTSE 100 and FTSE 50, k setting the total remuneration policy has given full consideration to the best some specific comparisons in the utilities on behalf of the Board; practice provisions set out in the Code. sector, and also general market data from k approving the detailed remuneration surveys. The Committee acknowledges terms of the Executive Directors too that SSE operates predominantly including their service contracts; in the UK with a growing portfolio of k approving the remuneration of Total Remuneration Policy overseas renewable development the Chairman; opportunities secured through Airtricity. k approving the design and performance At some future point this overseas targets of incentive schemes; and expansion may be reflected in the k granting awards under the company’s THE PRINCIPLES OF THE POLICY comparator groups. Long-term Incentive Plans. The core principles of the company’s THE BALANCE OF FIXED AND The Remuneration Committee regularly remuneration policy are to: VARIABLE REMUNERATION consults the Chief Executive, Ian Marchant, who attends and assists the Committee in k attract and retain Executive Directors Given the nature of the company’s respect of those Directors reporting to him, who are able to run the company business, the Committee believes that although he is not present when his own effectively for the benefit of shareholders, around half of the total remuneration remuneration is under discussion. customers and employees; should be performance-related, with k adopt a competitive and practical up to two thirds where performance is In addition, the Director of People, Graham approach to overall remuneration exceptional. This is demonstrated in the Juggins, and SSE’s Senior Executive which meets the expectations table on page 67 which shows how the Remuneration Adviser, Jane Williams, of shareholders; and variable pay increases according to the provided information and advice on the k reinforce the culture and teamwork achievement of stretch targets. The Directors’ remuneration, including required to deliver the long-term Committee is satisfied that the overall comparative data drawn from published growth and sustainability of the remuneration structure is set at levels remuneration and benefit surveys, and business, and hence base salaries which are reasonable and appropriate to advice on appropriate awards of bonuses, for Executive Directors are set at or reward performance sufficiently without long-term incentives and comparator below the relevant market median. causing any undue risk taking./­ Scottish and Southern Energy 69 Annual Report 2009

Executive Directors’ Remuneration 2008/09

Performance Measure Purpose – Link to Strategy Award Policy Base Salary Reflects market data, role, business and Reviewed annually – 1 January individual performance Short-term – Annual Bonus The specific standards of performance The performance targets are clearly Maximum award of up to 100% of base set by the Remuneration Committee linked to business objectives in the salary. 75% in cash (non-pensionable), are commercially confidential. There three elements as follows: 25% compulsorily deferred into shares are three elements to the Annual Bonus which only vest, subject to continued as follows: service, after three years:

Corporate Corporate Corporate k group financial performance relative k delivery of stretching financial k 60% for corporate financial to budgeted profit before tax performance target performance – the maximum corporate financial element is payable if performance exceeds by 10% or more the budgeted profit before tax target. No corporate element is payable if performance falls 5% below target.

Teamwork Teamwork Teamwork k safety performance k designed to reflect and support k 20% for teamwork k customer service company core values and delivery k operational efficiency of overall objectives for the Group k business development/sustainability GOVERNANCE k promotion of innovation k effective leadership

Personal Personal Personal k based on measurable and verifiable k objectives across a number of priority k 20% for personal objectives data relating to company values operational areas that link to the annual plan and strategy agreed by the Board Long-term – Performance Share Plan Performance is measured against the The two elements reflect both internal Maximum award up to 150% of base following two elements over a three year and external measures of performance. salary each year. period: Awards released to the extent performance conditions are met.

Total Shareholder Return (TSR) The relative TSR performance measure is 50% based on TSR against the FTSE 100 dependent on the company’s relative long- k 100% vests at or above the 75th term share price performance and dividend percentile return, and therefore brings a market k 25% vests at median perspective to the PSP. Further vesting k straight-line basis between median of this element requires the Committee and 75th percentile to be satisfied with the company’s k no vesting of award if median underlying financial performance. performance is not achieved

Adjusted Earnings per Share (EPS) Adjusted EPS growth is a key internal 50% based on EPS measure which is critical to the company’s k 100%: vests where EPS is RPI +9% long-term success and ties in with the above RPI Group’s strategic goals. k 25% vests where EPS is RPI +3% k straight-line basis between 3% and These target ranges are designed to strike 9% above RPI the right balance between being stretching k no vesting if EPS minimum growth at the top end, and being achievable and of RPI +3% is not achieved motivational at the lower end. Scottish and Southern Energy 70 Annual Report 2009 Remuneration Report – Remuneration Explained (continued)

SENIOR EXECUTIVES, MANAGERS Executive Directors’ Salaries AND EMPLOYEES Ian Marchant £840,000 There are a number of senior executives Gregor Alexander £483,000 below Board level who have a significant Colin Hood £630,000 influence on the performance of the Alistair Phillips-Davies £483,000 Group. The Committee remains fully aware of the need to ensure there is an appropriate relationship between Executive Director remuneration, and cognisance of the market and governance senior executives. Since 2007, allocations the levels of other senior executives’, trends when reviewing remuneration in equivalent to 150% of salary have been managers’ and other employees’ the forthcoming year. made to Executive Directors and at lower remuneration within the Group. The rates to other senior executives. The Committee considers this information CURRENT INCENTIVE PLANS Committee intends that awards under when reviewing the remuneration of the the PSP in 2009 should be on similar Executive Directors and is satisfied that Short-term Incentive – Annual Bonus Plan terms. Awards will be released after an appropriate remuneration and benefits The important factors which determine three years subject to the meeting of structure exists to recognise and retain the bonus award under the Annual Bonus demanding performance conditions its key executives. Plan are detailed on page 69. The bonus relating to the company’s relative total for 2008/09 was based on corporate shareholder return (TSR) performance In addition the Committee considers financial, teamwork and personal targets and the company’s adjusted EPS growth. the levels and type of remuneration set at the beginning of the year. The Further details of the performance increases for employees within the Group bonus paid for these elements was 60% targets are in the table on page 69. and any relevant external indices before of salary, compared with a maximum committing to any salary increases for possible of 100%, and with 75% paid in The Committee considers that the use the Executive Directors. respect of 2007/08. It was also lower than of these two performance measures, that applied to other annual bonuses in these proportions, to be appropriate. BASE SALARY payable within SSE. The relative TSR performance measure is dependent on the company’s relative The Committee conducted its regular This was on the basis of an assessment long-term share price performance, and review of salaries for Executive Directors by the Committee, which concluded that therefore brings a market perspective to in November 2008 as indicated on the the majority of operational and financial the PSP. Further, vesting of this element Remuneration Committee Agenda targets were met during the year and that requires the Committee to be satisfied Table on page 67 and decided that important steps were taken to position the with the underlying financial performance Executive Directors’ salaries should company for future long-term success. of the company. The TSR measure is increase for the following reasons: There will however be continued focus on balanced by a key internal measure, firstly that the salary, bonus and performance throughout SSE’s operations adjusted EPS growth, which is critical to performance share plans when including critical areas such as safety, the company’s long-term success and benchmarked to the FTSE 100 and customer service, generation plant ties in with the Group’s strategic goals. FTSE 50 remain below market median. availability and progress in renewable The Committee considers that the Secondly, SSE consistently achieves energy development. achievement of real annual adjusted challenging financial and business EPS growth of 9% above RPI per annum targets and is continuing with its long- For 2009/10 the structure of the bonus was, and remains, a suitably demanding term growth plans. Thirdly, each of the plan remains at 60% for corporate target for maximum vesting in light of Executive Directors have held senior financial performance, 20% based on the regulatory regime in which the management roles in which they teamwork, including performance in company operates. have delivered significant results to Group safety and commitment to the shareholders for many years. Since Group values, and 20% on individual The first award under the PSP was made 1998 SSE is one of only 11 FTSE 100 objectives. For 2009/10 the maximum in 2006, and will vest shortly after the companies to have delivered annually and target bonus opportunity will remain preliminary announcement of results dividend growth in excess of inflation. at 100% and 50% respectively of base for 2008/09 in May 2009. Both elements Finally the Committee took into account salary for the Executive Directors. of the performance condition (relating to other salary reviews in the Group when TSR and EPS performance respectively) considering an appropriate award. The Of any bonus awarded, 75% is paid in were met. TSR outturn was in the upper normal management salary review was cash and 25% deferred into shares which quartile of the FTSE 100, and EPS growth 5%. The main collective union agreement vest only after three years subject to was in excess of RPI +8% at 10.7% per award was 4.4% together with individual continued service. Bonus earnings are annum. The Committee has concluded increment progression averaging 1%. not pensionable. that this result is a fair reflection of the The Executive Directors received a company’s financial performance over salary increase of 5% with effect from Long-term Incentives – the period. Accordingly, the full number of 1 January 2009. The current salaries Performance Share Plan shares under this award will vest, together for the Executive Directors are as Under the rules of the Performance with an additional number of shares follows: Ian Marchant £840,000, Gregor Share Plan, conditional allocations of reflecting the notional reinvestment of Alexander £483,000, Colin Hood £630,000, shares up to a maximum of 150% of dividends during the period. Achievement Alistair Phillips-Davies £483,000. The salary (100% for the 2006 award) may be of these performance conditions was Committee will continue to take full made to Executive Directors and other independently verified. Scottish and Southern Energy 71 Annual Report 2009

PENSIONS POLICY Minimum Shareholding Requirement for Executive Directors

Membership of a relevant pension plan is Minimum number Shares held as at of shares** 31 March 2009 encouraged throughout the Group. All the Executive Directors were members of either Ian Marchant 75,744 142,204 the Southern Electric Pension Scheme or Gregor Alexander 43,553 46,128 the Scottish Hydro Electric Pension Scheme Colin Hood 56,808 92,585* when they were appointed to the Board, and Alistair Phillips-Davies 43,553 55,502* they remain members. These are both funded final salary pension schemes. The * The shareholding in the above table takes account of certain holdings under the Directors’ service contracts provide for a Deferred Bonus Scheme (net of tax) matured but may not have been exercised. possible maximum pension of two thirds ** Calculated using share price @ 31 March 2009 1,109p. final salary at age 60. In relation to Executive Directors who are subject to the scheme Total Shareholder Return specific salary cap (which mirrors the provisions of the previous HM Revenue and 300 SSE Customs cap arrangements) the company FTSE 100 provides top-up (unfunded) arrangements 250 which are designed to provide an equivalent pension on retirement at age 60 to that 200 which they would have earned if they had not been subject to the salary cap. The 150 Executive Directors have no right to any special or preferential pension benefit terms 100 upon leaving. However, in common with all members of the pension schemes who Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 joined at the time the Directors joined the schemes, in the case of retirement through TSR Performance Graph ill-health an unreduced pension based on The graph above charts the cumulative TSR of the company since 1 April 2004 compared service to expected retirement is paid. In the to the FTSE 100 Index over the same period. The company is a member of the FTSE 100 case of reorganisation or redundancy an Index, and this was considered to be the most relevant index for comparative purposes. GOVERNANCE unreduced accrued pension is paid to a For the purposes of defining the constituents of the FTSE 100, companies moved from the member who has reached the age of 50 FTSE as a result of a business transaction will be valued at the date of removal and then or above, with at least five years’ service or, indexed to the FTSE 100 annual outturn. Those companies acquired by another FTSE for a member who has not yet reached that constituent will be disregarded as the acquiring company is a FTSE 100 participant. age, it is payable with effect from 50.

Previous HM Revenue & Customs limits other senior Executives should acquire (including a requirement to finance have ceased to apply to benefits provided and maintain a level of shareholding exercise of the option using the proceeds by the pension schemes. If a member’s approximately equivalent to one year’s of a monthly savings contract of up accrued fund exceeds the new lifetime salary, to be attained within a reasonable to £250 per month), and, in common allowance (LTA), the benefits payable by the timescale. Consent to sell shares under with all such schemes, exercise of the scheme from that excess will be subject to the company’s Share Dealing Code is not option is not subject to satisfaction of a a higher rate of income tax. The company normally given (unless in exceptional performance target. The option price is is maximising the use of the new allowance circumstances or to fund a connected tax set at a discount of 10% to market value. thereby providing Executive Directors with liability) until this level of shareholding is more of their existing benefits via registered reached. It is also expected that all non- (b) The Share Incentive Plan (the SIP) schemes. In the case of Colin Hood, who Executive Directors should hold a minimum allows employees to allocate part of was not subject to the previous earnings cap of 2,000 shares in the company. their pre-tax salary to purchase shares but is now limited by the LTA, further accrual up to a maximum of £125 per month. is via an unfunded arrangement. There are The table above contains the shareholdings The SIP operates within specific tax no arrangements to compensate members of the Executive Directors as at the year-end legislation. During the first six months for any change in their personal tax liability. and demonstrates that their personal of the year, the company matched shareholdings meet the requirements the first five shares purchased by SHARE OWNERSHIP POLICY of the policy. participants, and during the second half of the year participants received Share ownership is encouraged throughout ALL-EMPLOYEE SHARE SCHEMES monthly two free matching shares the Group. In addition the Committee for each share purchased up to a believes that the interests of the Executive Executive Directors are eligible to participate maximum of six free shares. Directors and other senior Executives in the company’s all-employee share should be closely aligned with those of schemes on the same terms as other (c) The long service award scheme which shareholders. The Performance Share Plan, employees. These schemes comprise: purchases 10, 20, 30, 40 or 50 shares on Deferred Bonus Plan and employee share behalf of an employee on the occasion schemes provide considerable alignment. (a) The Sharesave Scheme, a savings- of the employee reaching 10, 20, 30, The company has also adopted a policy that related share option scheme which 40 or 50 years’ service respectively the Executive Directors and certain operates within specific tax legislation with the Group./­ Scottish and Southern Energy 72 Annual Report 2009 Remuneration Report – Remuneration Explained (continued)

Length of Service and Contract Term contract is terminated for any other reason any share awards under the Performance Industry Length of Board Notice to be given Share Plan will lapse from the effective service service by the company date of contract termination. Ian Marchant 17 13 years* 12 months Gregor Alexander 18 6 years 12 months In the event of a change of control of the Colin Hood 31 8 years 12 months company, performance in the PSP will Alistair Phillips-Davies 12 7 years 12 months be measured to the date of the change *including 3 years as Finance Director of Southern Electric plc. of control and will normally be scaled down to the period prior to the change of control. Current Non-Executive Directors’ Fees 2008/09

Committee OUTSIDE APPOINTMENTS Annual fee Chair fee Total fees £000 £000 £000 Executive Directors are entitled to accept Thomas Andersen 50 – 50 a non-Executive appointment outside the Nick Baldwin 50 – 50 company with the consent of the Board, Richard Gillingwater 50 – 50 as such appointments can enhance René Médori 50 12 62 directors’ experience and value to the Susan Rice 60 10 70 company. Any fees received can be Lord Smith of Kelvin 321 – 321 retained by the Director. In 2008/09 Ian Marchant held a non-Executive Director position with the John Wood Group plc, and received £44,000 in fees. Funding of Share Schemes and Dilution schemes and Executive incentive plans; The company’s Sharesave Scheme uses k They are each entitled to a company unissued shares to satisfy the exercise car or a cash allowance, membership of share options. As at 31 March 2009, of the company’s pension scheme Non-Executive Directors there were approximately 4.4 million including life assurance cover equal share options outstanding under this to four times salary, and private health scheme, and if all the outstanding options insurance which also covers were exercised this would amount to dependants; and The remuneration of non-Executive 0.48% of the issued share capital of the k The contracts are each for an Directors, apart from the company company at that date. indefinite term ending automatically Chairman, is agreed by the Board annually, on retirement date (age 60), but may with the non-Executive Directors concerned Shares are purchased in the market to be terminated by 12 months’ notice not participating in this process. The fees satisfy the exercise of awards under the given by the company or by 12 months’ are reviewed against companies of similar Deferred Bonus Plan, the Performance notice given by the Director. size and complexity. Share Plan, and the Share Incentive Plan. The company may at its discretion elect The non-Executive Directors do not have The Committee reviewed the effect on the to terminate any Executive Director’s service contracts but instead have letters EPS calculation in the Performance Share contract by making a payment in lieu of appointment. They are appointed for Plan of the share placing of 42 million of notice equal to the basic salary which fixed terms of three years, subject to shares in January 2009. It was confirmed would have been received during the retirement by rotation and re-appointment that the effect was minimal. notice period (excluding any bonus and at AGMs in terms of the company’s Articles any other emolument referable to the of Association. They do not participate employment). Payments in lieu of notice in the Bonus Scheme, Deferred Bonus may be made in staged payments, and Plan, any of the share option schemes, or Service Contracts such payments will either reduce or contribute to any Group pension scheme. cease completely in circumstances where the departing Executive Director k The standard non-Executive fee, gains new employment. There is also a inclusive of Committee Memberships, It is the company’s policy that Executive specific provision obliging the departing is £50,000. Directors should have service contracts Executive to mitigate his/her loss in these k The Chairman of the Audit Committee with the company which are terminable circumstances. There are no special received an additional fee of £12,000. on 12 months’ notice given by either provisions applying in the event of change k The Chairman of the Remuneration party. The key aspects of each contract of control. Committee received an additional fee are as follows: of £10,000. In the event that an Executive Director k The Senior Independent Director k The Executive Directors are employed leaves in circumstances such as retirement received an additional fee of £10,000. under service contracts with the or redundancy, the PSP shares will vest at k The Chairman received an inclusive flat company each dated 11 March 2005; their normal vesting date, and the number fee of £317,000, increasing to £332,500 k They are eligible under the contracts of shares will be reduced to reflect the with effect from January 2009. to participate in the company’s point during the three year performance Executive Directors’ bonus scheme, period when the Director leaves. If the the company’s employee share Executive Director resigns or the service Scottish and Southern Energy 73 Annual Report 2009 Remuneration Report – Remuneration in Detail

The Auditors are required to report on the information contained in Tables A, B and D.

Table A – Directors’ Emoluments 2009 2008 Salary/fee Bonuses Benefits Total Total £000 £000 £000 £000 £000 Executive Directors Ian Marchant 810 378 19 1,207 1,208 Gregor Alexander 466 217 16 699 689 Colin Hood 608 283 17 908 899 Alistair Phillips-Davies 466 217 16 699 687

Non-Executive Directors Thomas Andersen (i) 13 – – 13 0 Nick Baldwin 50 – – 50 45 Richard Gillingwater 50 – – 50 38 René Médori 62 – – 62 57 Susan Rice 70 – – 70 62 Lord Smith of Kelvin (Chairman) 321 – – 321 293

Former Directors David Payne (ii) - - - - 24 Sir Kevin Smith (iii) 17 - - 17 45 2,933 1,095 68 4,096 4,047

(i) From date of appointment to the Board on 1 January 2009. (ii) Retired from the Board 26 July 2007. (iii) Retired from the Board 24 July 2008.

In addition to the annual cash bonus amount for this year, Ian Marchant, Gregor Alexander, Colin Hood and Alistair Phillips-Davies GOVERNANCE will be awarded £126k, £72k, £94k and £72k respectively in the form of deferred shares in respect of the bonus due to them for 2008/09. These share awards will not be made until June 2009 and therefore the number of shares to which the Executive Directors will be entitled will not be known until that date. These shares will, subject to continued employment, be released on the third anniversary of grant.

Table B – Directors’ Retirement Benefits

Accrued benefit Transfer value of accrued benefit Increase in year Increase in year Increase Increase in Years of At 31 March including excluding At 31 March At 31 March less Directors’ year excluding industry 2009 inflation inflation 2009 2008 contributions inflation service £000 £000 £000 £000 £000 £000 £000 Ian Marchant 17 318 45 31 3,972 3,503 452 336 Gregor Alexander 18 181 27 22 2,242 1,799 425 258 Colin Hood 31 305 34 20 5,500 5,181 302 436 Alistair Phillips-Davies 12 131 21 17 1,552 1,253 282 133

Members of the scheme have the option to pay additional voluntary contributions; neither the contributions nor the resulting benefits are included in the above table. The retirement age of Executive Directors is 60.

The following is information relating to the pension of Gregor Alexander as a participant in the HM Revenue & Customs approved Scottish Hydro Electric Pension Scheme.

(i) Dependants’ pensions on death are half of members’ pension entitlements, together with a capital sum equal to four times pensionable pay. On death in retirement, the Director’s spouse will receive a pension equal to half of that payable to the Director. In addition, on death within the first five years of retirement, a lump sum is payable equal to the balance outstanding of the first five years’ pension payments.

(ii) All benefit payments are guaranteed to increase annually by the same percentage as state pensions, which are currently linked to movements in the UK Retail Price Index./­ Scottish and Southern Energy 74 Annual Report 2009 Remuneration Report – Remuneration in Detail (continued)

The following is information relating to the Directors’ pensions of Colin Hood, Ian Marchant and Alistair Phillips-Davies, as participants in the HM Revenue & Customs approved Southern Electric Group of the Electricity Supply Pension Scheme.

(i) Dependants’ pensions on death are four-ninths of the member’s pensionable pay, together with a capital sum equal to four times pensionable pay. If death occurs after attaining the age of 55 an additional lump sum between three to five times notional pension is payable dependent upon age and length of service. On death in retirement, the Director’s spouse will receive a pension equal to two-thirds of that payable to the Director. In addition, on death within the first five years of retirement, a lump sum is payable equal to the balance outstanding of the first five years’ pension payments.

(ii) Post retirement increases are expected to be in line with inflation (guaranteed up to the level of 5% per annum and discretionary above that level). All the Executive Directors have unfunded retirement benefits which are included in their pension benefits above with provision in respect of their accrued value included in the Company’s Balance Sheet.

Table C – Directors’ Interests 31 March 2009 1 April 2008* Shares under Shares under Shares held option Shares held option Gregor Alexander 46,128 151,576 32,630 120,508 Thomas Andersen 2,000 – 2,000 N/A Nick Baldwin 2,119 – 2,024 – Richard Gillingwater 2,000 – 2,000 – Colin Hood 28,308 292,664 27,967 227,324 Ian Marchant 142,204 276,370 119,178 223,656 René Médori 2,050 – 2,000 – Alistair Phillips-Davies 31,625 186,150 31,353 136,026 Susan Rice 4,632 – 4,423 – Lord Smith of Kelvin 22,600 – 22,600 –

* or date of appointment, if later.

From 31 March 2009 to 20 May 2009, the following changes to the interests of Directors took place:

Under standing orders for reinvestment of PEPs, on 1 April 2009, Ian Marchant acquired 11 shares and Colin Hood acquired 39 shares.

Under a standing order for reinvestment of an ISA, on 6 April 2009 Gregor Alexander acquired 12 shares.

Under the Share Incentive Plan, on 30 April 2009, Ian Marchant, Colin Hood and Gregor Alexander each acquired 12 shares and Alistair Phillips-Davies acquired 11 shares.

The Register of Directors’ Interests (which is open to shareholders’ inspection) contains full details of Directors’ shareholdings and options to subscribe for shares.

Table D opposite shows the interests of the Executive Directors in awards granted under the Deferred Bonus Scheme (DBS), Deferred Bonus Plan 2006 (DBP 2006) and the Performance Share Plan (PSP) and in options granted under the ShareSave Scheme during the year ended 31 March 2009. Scottish and Southern Energy 75 Annual Report 2009

Table D – Executive Directors’ Long Term Incentive Interests No. of No. of No. of Normal Shares under Option Additional Shares Shares under Date of Exercise Period award as at Exercise shares awarded released award at Share Plan Award (or Vesting Date) 1 April 2008 Price during the year6 during the year 31 March 2009 Ian Marchant DBS4 30/06/05 30/06/08-30/06/15 35,107 35,1077 DBS 06/06/06 06/06/09-06/06/16 46,081 46,081 DBP 20065 08/06/07 08/06/10 11,962 11,962 DBP 2006 10/06/08 10/06/11 9,709 9,709 PSP3 27/07/06 May 2009 54,142 54,142 PSP2 26/07/07 May 2010 75,313 75,313 PSP 10/06/08 May 2011 77,670 77,670 Sharesave 01/10/04 01/10/09-31/03/10 1,051 622p 1,051 Sharesave 01/10/08 01/10/11-31/03/12 1274p 442 442 Colin Hood DBS4 11/07/02 11/07/05-11/07/12 16,108 16,108 DBS 02/07/03 02/07/06-02/07/13 19,116 19,116 DBS 20/07/04 20/07/07-20/07/14 25,249 25,249 DBS 30/06/05 30/06/08-30/06/15 26,079 26,079 DBS 06/06/06 06/06/09-06/06/16 33,446 33,446 DBP 20065 08/06/07 08/06/10 8,598 8,598 DBP 2006 10/06/08 10/06/11 7,087 7,087 PSP3 27/07/06 May 2009 40,607 40,607 PSP2 26/07/07 May 2010 56,485 56,485 PSP 10/06/08 May 2011 58,253 58,253 Sharesave 01/10/05 01/10/10-31/03/11 1,492 886p 1,492 Sharesave 01/10/07 01/10/10-31/03/11 144 1306p 144 Gregor Alexander DBS4 30/06/05 30/06/08-30/06/15 17,386 17,3867 DBS 06/06/06 06/06/09-06/06/16 23,311 23,311 DBP 20065 08/06/07 08/06/10 6,518 6,518

DBP 2006 10/06/08 10/06/11 5,493 5,493 GOVERNANCE PSP3 27/07/06 May 2009 28,301 28,301 PSP2 26/07/07 May 2010 42,364 42,364 PSP 10/06/08 May 2011 44,661 44,661 Sharesave 01/10/03 01/10/08-31/03/09 1,700 562p 1,7008 Sharesave 01/10/04 01/10/09-31/03/10 630 622p 630 Sharesave 01/10/05 01/10/10-31/03/11 298 886p 298 Alistair Phillips-Davies DBS4 20/07/04 20/07/07-20/07/14 16,211 16,211 DBS 30/06/05 30/06/08-30/06/15 17,386 17,386 DBS 06/06/06 06/06/09-06/06/16 23,311 23,311 DBP 20065 08/06/07 08/06/10 6,588 6,588 DBP 2006 10/06/08 10/06/11 5,463 5,463 PSP3 27/07/06 May 2009 28,301 28,301 PSP2 26/07/07 May 2010 42,364 42,364 PSP 10/06/08 May 2011 44,661 44,661 Sharesave 01/10/05 01/10/10-31/03/11 1,865 886p 1,865

1. Shares which are released under the DBS, DBP 2006, and PSP attract additional shares in respect of the notional reinvestment of dividends. Shares released under the DBS during the year included the following arising from such notional reinvestment: Ian Marchant – 4,324 shares; Gregor Alexander – 2,141 shares. 2. The performance conditions applicable to awards under the PSP since 2007 are described on page 70. 3. The 2006 award under the PSP was subject to a slightly different target in that full vesting would occur after three years for EPS growth of RPI plus 8% and TSR at or above 75th percentile, and 30% of the award vesting for median performance for TSR and EPS growth of RPI plus 3%. This award will vest shortly after preliminary announcement of the company’s results for 2008/09 in May 2009. As described on page 70, the performance conditions were met in full, so that the full number of shares stated will be released, plus a further number of shares in respect of notional reinvestment of dividends. 4. The DBS was the company’s main long-term incentive arrangement prior to the introduction of the PSP in 2006. Vesting of shares was dependent on continued service over a three year period. The number of shares placed under option under the DBS depended on meeting financial and non-financial performance criteria in the financial years preceding the award, and therefore no further performance condition applies to the vesting of DBS options. The final DBS options, which were granted in June 2006 in relation to 2005/06 performance, will vest in June 2009, but participants may exercise their options during the period indicated in the table. 5. Since 2007, 25% of annual bonus payable to Executive Directors and Senior Managers has been satisfied as a conditional award of shares under the DBP 2006. Vesting of shares is dependent on continued service over a three year period. In view of the linkage to annual bonus, no further performance condition applies to the vesting of DBP 2006 awards. 6. The market value of a share on the date on which these awards were made was 1145.5p. 7. The market value of a share on the date on which these awards were realised was 1400p. 8. The market value of a share on the date this option was exercised was 1445p. The closing market price of the shares at 31 March 2009 was 1109p and the range for the year was 1040p to 1541p. Awards granted during the year were granted under the DBP 2006 and the PSP. Options were granted under the Sharesave scheme. The aggregate amount of gains made by the Directors on the exercise of share options and realisation of awards during the year was £840,423.00 (2008 – £838,836.90). No options or awards lapsed in the year.

This report was approved by the Board and signed on its behalf by:

Susan Rice Remuneration Committee Chairman, 20 May 2009 Scottish and Southern Energy 76 Annual Report 2009 Independent Auditor’s Report to the members of Scottish and Southern Energy plc

We have audited the Group and parent company financial statements (the ‘financial statements’) of Scottish and Southern Energy plc for the year ended 31 March 2009 which comprise the Consolidated Income Statement, the Consolidated and Parent Company Balance Sheets, the Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statement of Recognised Income and Expense and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.

This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective Responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU are set out in the Statement of Directors’ Responsibilities on page 65.

Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the financial statements, Article 4 of the IAS Regulation. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements. The information given in the Director’s Report includes that specific information presented in the Chief Executive’s Statement that is cross referenced from the Business Review section of the Director’s Report. We also report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements and the part of the Directors’ Remuneration Report to be audited.

Opinion In our opinion: k the consolidated financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 31 March 2009 and of its profit for the year then ended; k the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 March 2009; k the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the financial statements, Article 4 of the IAS Regulation; and k the information given in the Director’s Report is consistent with the financial statements. KPMG Audit Plc Chartered Accountants Registered Auditor Edinburgh 20 May 2009 Scottish and Southern Energy 77 Annual Report 2009 Consolidated Income Statement for the year ended 31 March

2009 2008 Before Exceptional Before Exceptional exceptional items and certain exceptional items and certain items and certain re-measurements items and certain re-measurements re-measurements (note 5) Total re-measurements (note 5) Total Note £m £m £m £m £m £m Revenue 3 25,424.2 – 25,424.2 15,256.3 – 15,256.3 Cost of sales (23,552.7) (1,291.7) (24,844.4) (13,509.8) (187.8) (13,697.6) Gross profit 1,871.5 (1,291.7) 579.8 1,746.5 (187.8) 1,558.7 Operating costs 4 (576.5) – (576.5) (605.7) – (605.7) Other operating income – 102.7 102.7 0.1 55.0 55.1 Operating profit before jointly controlled entities and associates 1,295.0 (1,189.0) 106.0 1,140.9 (132.8) 1,008.1 Jointly controlled entities and associates: Share of operating profit 246.4 – 246.4 242.6 – 242.6 Share of interest (128.2) – (128.2) (127.6) – (127.6) Share of movement on derivatives – 3.8 3.8 – 4.2 4.2 Share of tax (39.3) (1.1) (40.4) (41.9) 31.2 (10.7) Share of profit on jointly controlled entities and associates 13 78.9 2.7 81.6 73.1 35.4 108.5 Operating profit 3 1,373.9 (1,186.3) 187.6 1,214.0 (97.4) 1,116.6 Finance income 7 209.7 – 209.7 202.6 – 202.6 Finance costs 7 (369.8) 25.8 (344.0) (233.9) (1.5) (235.4) Profit before taxation 1,213.8 (1,160.5) 53.3 1,182.7 (98.9) 1,083.8 Taxation 8 (300.6) 359.6 59.0 (306.8) 96.2 (210.6) Profit for the year 913.2 (800.9) 112.3 875.9 (2.7) 873.2

Attributable to: Equity holders of the parent 913.2 (800.9) 112.3 875.6 (2.7) 872.9 Minority interest – – – 0.3 – 0.3

Basic earnings per share (pence) 10 12.7p 101.1p Diluted earnings per share (pence) 10 12.8p 101.0p Adjusted earnings per share (pence) 10 108.0p 105.6p

Dividends paid in the year (£m) 9 £551.9m £502.8m

The accompanying notes are an integral part of these financial statements. FINANCIAL STATEMENTS FINANCIAL STATEMENTS Scottish and Southern Energy 78 Annual Report 2009 Balance Sheets as at 31 March

Consolidated Company 2008 2009 restated 2009 2008 Note £m £m £m £m Assets Property, plant and equipment 12 7,232.2 6,334.3 – – Intangible assets: Goodwill 11 724.0 659.0 – – Other intangible assets 11 253.0 256.9 – – Investments in associates and jointly controlled entities 13 918.7 917.8 456.9 516.9 Investments in subsidiaries 14 – – 2,154.2 2,137.8 Other investments 13 18.3 6.0 – – Trade and other receivables 17 – – 2,066.9 1,772.7 Retirement benefit assets 27 – 85.8 – 85.8 Deferred tax assets 23 100.1 43.1 32.7 – Derivative financial assets 29 449.2 318.9 – – Non-current assets 9,695.5 8,621.8 4,710.7 4,513.2

Intangible assets 11 213.9 138.9 – – Inventories 16 366.7 251.2 – – Trade and other receivables 17 5,659.6 3,400.3 3,465.7 2,429.2 Cash and cash equivalents 18 295.9 255.3 135.1 104.2 Derivative financial assets 29 1,537.7 1,106.5 178.1 1.1 Current assets 8,073.8 5,152.2 3,778.9 2,534.5 Total assets 17,769.3 13,774.0 8,489.6 7,047.7

Liabilities Loans and other borrowings 22 1,060.1 1,847.6 916.4 1,696.3 Trade and other payables 19 4,364.9 3,399.9 2,635.5 3,580.2 Current tax liabilities 20 254.6 220.8 – 9.0 Provisions 24 13.8 9.5 – – Derivative financial liabilities 29 2,451.0 1,229.4 130.8 – Current liabilities 8,144.4 6,707.2 3,682.7 5,285.5

Loans and other borrowings 22 4,336.1 2,073.6 2,868.5 612.6 Deferred tax liabilities 23 594.7 967.3 – 9.6 Trade and other payables 19 426.0 490.1 – – Provisions 24 60.2 107.3 – – Retirement benefit obligations 27 273.5 134.9 – – Derivative financial liabilities 29 959.5 313.3 – – Non-current liabilities 6,650.0 4,086.5 2,868.5 622.2 Total liabilities 14,794.4 10,793.7 6,551.2 5,907.7 Net assets 2,974.9 2,980.3 1,938.4 1,140.0

Equity: Share capital 25 460.2 435.1 460.2 435.1 Share premium 26 835.3 315.7 835.3 315.7 Capital redemption reserve 26 22.0 22.0 22.0 22.0 Equity reserve 26 0.8 3.9 0.8 3.9 Hedge reserve 26 19.6 2.3 43.3 7.1 Translation reserve 26 146.6 25.4 – – Retained earnings 26 1,492.7 2,175.6 576.8 356.2 Total equity attributable to equity holders of the parent 2,977.2 2,980.0 1,938.4 1,140.0 Minority interest 26 (2.3) 0.3 – – Total equity 2,974.9 2,980.3 1,938.4 1,140.0

These financial statements were approved by the Board of Directors on 20 May 2009 and signed on their behalf by:

Gregor Alexander Lord Smith of Kelvin Finance Director Chairman Scottish and Southern Energy 79 Annual Report 2009 Statements of Recognised Income and Expense for the year ended 31 March

Consolidated Company 2009 2008 2009 2008 £m £m £m £m Gains on effective portion of cash flow hedges (net of tax) 16.5 11.6 36.2 18.0 Transferred to income statement on cash flow hedges (net of tax) – 8.0 – – Effective net investment hedge (net of tax) (102.9) (21.1) – – Actuarial (loss) on retirement benefit schemes (net of tax) (200.8) (17.4) (78.0) (43.3) Exchange difference on translation of foreign operations 221.7 46.5 – – Jointly controlled entities and associates: Share of gains/(losses) on effective portion of cash flow hedges (net of tax) 3.2 (6.8) – – Share of actuarial (losses)/gain on retirement benefit schemes (net of tax) (38.3) 16.4 – – Net (expense)/income recognised directly in equity (100.6) 37.2 (41.8) (25.3) Profit for the year 112.3 873.2 852.0 550.6 Total recognised income and expense for the year 11.7 910.4 810.2 525.3 Attributable to: Equity holders of the parent 11.7 910.1 810.2 525.3 Minority interests – 0.3 – – 11.7 910.4 810.2 525.3 FINANCIAL STATEMENTS FINANCIAL STATEMENTS Scottish and Southern Energy 80 Annual Report 2009 Cash Flow Statements for the year ended 31 March

Consolidated Company 2009 2008 2009 2008 £m £m £m £m Cash flows from operating activities Profit for the year after tax 112.3 873.2 852.0 550.6 Taxation (59.0) 210.6 (40.8) (2.4) Movement on financing and operating derivatives 1,265.9 167.1 (37.5) 1.6 Exchange loss in relation to foreign investment – 22.2 – – Finance costs 369.8 233.9 447.0 251.2 Finance income (209.7) (202.6) (256.9) (191.7) Share of jointly controlled entities and associates (81.6) (108.5) – – Income from investment in subsidiaries – – (970.7) (609.3) Pension service charges less contributions paid (49.3) (44.4) (14.5) (13.4) Depreciation and impairment of assets 315.9 267.8 – – Amortisation and impairment of intangible assets 14.4 32.5 – – Impairment of inventories 8.2 – – – Release of provisions (47.5) – – – Deferred income released (16.7) (15.1) – – (Increase) in inventories (127.7) (25.9) – – (Increase) in receivables (2,048.3) (571.5) (1,508.9) (779.0) Increase/(decrease) in payables 958.0 725.5 (538.0) 990.1 Increase/(decrease) in provisions 4.7 (6.4) – – Charge in respect of employee share awards (before tax) 14.3 10.8 – – Profit on disposal of property, plant and equipment (2.0) (65.3) – – Profit on disposal of 50% of Greater Gabbard Offshore Winds (102.7) – – – Profit on disposal of fixed asset investment (2.2) – (2.2) – Loss on disposal of replaced assets 0.3 0.4 – – Cash generated from operations 317.1 1,504.3 (2,070.5) 197.7

Dividends received from jointly controlled entities 39.8 35.1 – – Dividends paid to minority investment holders (2.6) – – – Dividends received from subsidiaries – – 970.7 979.3 Finance income 74.4 61.2 192.2 124.9 Finance costs (219.2) (108.6) (348.2) (201.3) Income taxes paid (255.5) (283.6) (255.3) (289.3) Payment for consortium relief (0.4) (7.6) (0.4) (7.6) Net cash from operating activities (46.4) 1,200.8 (1,511.5) 803.7

Cash flows from investing activities Purchase of property, plant and equipment (1,172.2) (798.8) – – Purchase of other intangible assets (37.5) (16.9) – – Deferred income received 24.8 8.9 – – Proceeds from sale of property, plant and equipment 3.8 100.6 – – Proceeds from disposal of 50% of Greater Gabbard Offshore Winds 308.5 – – – Purchase of 50% of Greater Gabbard Offshore Winds (40.0) – – – Proceeds from sale of fixed asset investment 2.4 – 2.4 – Loans to jointly controlled entities (262.0) (50.1) – – Purchase of Airtricity (note 15) (2.1) (1,302.2) (2.1) (1,302.2) Purchase of businesses and subsidiaries (note 15) (26.3) (65.7) – – Cash acquired in purchases 0.1 597.3 – – Investment in jointly controlled entities and associates (44.7) – – – Investment in Marchwood Power (note 15) (19.7) – – – Loans and equity repaid by jointly controlled entities 79.7 10.8 60.0 – Increase in other investments (12.5) (14.5) – – Net cash from investing activities (1,197.7) (1,530.6) 60.3 (1,302.2)

Scottish and Southern Energy 81 Annual Report 2009

Consolidated Company 2009 2008 2009 2008 £m £m £m £m Cash flows from financing activities Proceeds from issue of share capital 479.6 2.2 479.6 2.2 Repurchase of ordinary share capital for cancellation – (237.0) – (237.0) Dividends paid to company’s equity holders (551.9) (502.8) (551.9) (502.8) Employee share awards share purchase (15.8) (12.4) (15.8) (12.4) New borrowings 3,203.1 2,275.1 3,266.5 1,696.4 Borrowings acquired in purchases – (543.0) – – Repayment of borrowings (1,835.3) (466.6) (1,696.3) (349.5) Net cash from financing activities 1,279.7 515.5 1,482.1 596.9

Net increase in cash and cash equivalents 35.6 185.7 30.9 98.4

Cash and cash equivalents at the start of year (note 18) 243.1 48.4 104.2 5.8 Net increase in cash and cash equivalents 35.6 185.7 30.9 98.4 Effect of foreign exchange rate changes 14.9 9.0 – – Cash and cash equivalents at the end of year (note 18) 293.6 243.1 135.1 104.2 FINANCIAL STATEMENTS FINANCIAL STATEMENTS Scottish and Southern Energy 82 Annual Report 2009 Notes on the Financial Statements for the year ended 31 March

1. SIGNIFICANT ACCOUNTING POLICIES

General information Scottish and Southern Energy plc (the Company) is a company domiciled in Scotland. The address of the registered office is Inveralmond House, 200 Dunkeld Road, Perth PH1 3AQ. The Group’s operations and its principal activities are set out in the Chief Executive’s Statement at pages 8 to 17. The consolidated financial statements for the year ended 31 March 2009 comprise those of the Company and its subsidiaries (together referred to as the Group). The Company financial statements present information about the Company as a separate entity and not about the Group. Under section 230(4) of the Companies Act 1985 the Company is exempt from the requirement to present its own income statement and related notes.

Basis of preparation

Statement of compliance The financial statements were authorised for issue by the directors on 20 May 2009. The financial statements have been prepared in accordance with International Financial Reporting Standards and its interpretations as adopted by the European Union (adopted IFRS).

Going concern The Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future and expects to issue further debt in the capital markets during 2009/10 to meet its funding requirements. The financial statements are therefore prepared on a going concern basis. Further details of the Group’s liquidity position and going concern review are provided in note 29 of the financial statements on page 133.

Basis of measurement The financial statements of the Group and the Company are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair-value: certain derivative financial instruments, financial instruments classified as available for sale and the assets and liabilities of the Group pension scheme. The directors believe the financial statements present a true and fair view. The financial statements of the Group and Company are presented in pounds sterling. Operations and transactions conducted in currencies other than pounds sterling are included in the consolidated financial statements in accordance with the Group’s foreign currencies accounting policy.

Use of estimates and judgements The preparation of financial statements conforming with adopted IFRS requires the use of certain accounting estimates. It also requires management to exercise judgement in the process of applying the accounting policies. The areas involving a higher level of judgement or estimation are summarised at pages 89 and 90.

Exceptional items and certain re-measurements As permitted by IAS 1 Presentation of Financial Statements, the Group has disclosed additional information in respect of jointly controlled entities and associates, exceptional items and certain re-measurements on the face of the income statement to aid understanding of the Group’s financial performance. An item is treated as exceptional if it is considered unusual by nature and scale and of such significance that separate disclosure is required for the financial statements to be properly understood. Certain re-measurements are re-measurements arising on certain commodity, interest rate and currency contracts which are accounted for as held for trading or as fair-value hedges in accordance with the Group’s policy for such financial instruments. This excludes commodity contracts not treated as financial instruments under IAS 39 where held for the Group’s own use requirements.

Standards, amendments and interpretations The following accounting standards, amendments and interpretations have been adopted by Group from 1 April 2008: k IFRIC 14 – IAS 19, The Limit on a Defined Benefit Assets, Minimum Funding Requirements and their Interaction

The impact of adopting this interpretation was to increase liabilities recognised in relation to the Southern Electric Pension Scheme by £89.8m. The following published standards and interpretations are not yet effective and have not been early adopted by the Group: k IFRIC 12 Service Concession Arrangements k IFRIC 13 Customer Loyalty Programmes k IFRIC 15 Agreements for the Construction of Real Estate k IFRIC 16 Net Investment in a Foreign Operation k IFRIC 17 Distributions of Non-cash Assets to Owners k IFRIC 18 Transfers of Assets from Customers k IFRS 8 Operating Segments k Amendment to IAS 1 Presentation of Financial Statements – A Revised Presentation k Amendments to IAS 23 Borrowing Costs k Amendments to IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries k Amendments to IFRS 3 Business Combinations k Amendments to IAS 39 and IFRS 7

The impact of these new standards has not been fully analysed and this will be assessed in future accounting periods. Scottish and Southern Energy 83 Annual Report 2009

Basis of consolidation

The financial statements consolidate the financial statements of the Company and its subsidiaries together with the Group’s share of the results and net assets of its jointly controlled entities and associates.

Subsidiaries Subsidiaries (including special purpose entities) are those entities controlled by the Group or the Company. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity in order to obtain benefits from its activities. In assessing control, potential voting rights that are exercisable or convertible are taken into account. The financial statements of subsidiaries acquired are consolidated in the financial statements of the Group from the date that control commences until the date control ceases. All business combinations are accounted for by applying the purchase method of accounting.

The special purpose entities referred to relate to entities in which the Group has a 50% shareholding but whose activities the Group is deemed to control under SIC-12 Consolidation – Special Purpose Entities.

In the Company, investments in subsidiaries are carried at cost less any impairment charges. Pre-acquisition dividends are accounted for as a reduction in the cost of investment in the subsidiary.

Associates Associates are those entities in which the Group has significant influence but not control over the financial and operating policies, namely where the Group has a shareholding of between 20% and 50% of the voting rights. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases.

Joint ventures Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractual agreement. In the consolidated financial statements, investments are accounted for under the equity method of accounting. Jointly controlled operations are businesses which use assets and liabilities that are separable from the rest of the Group. In these arrangements, the Group accounts for its own share of property, plant and equipment, carries its own inventories, incurs its own expenses and liabilities and raises its own finance.

In the Company, investments in jointly controlled entities are carried at cost less any impairment charges.

Transactions eliminated on consolidation Intra-Group balances and any unrealised gains and losses or income and expenses arising from Intra-Group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains and losses arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the entity.

Accounting policies

Revenue recognition: energy, services and goods relating to the sale of energy Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and that the revenue can be reliably measured. Revenue comprises sales of energy, use of system income, gas storage facility revenue, the value of services and facilities provided and goods sold during the year in the normal course of business.

Revenue on energy sales, comprises sales to retail end-user customers including an estimate of the value of electricity and gas supplied to customers between the date of the last meter reading and the year end. Revenue on energy sales also includes monies received from the electricity and gas balancing markets in the UK and other wholesale energy market sales. Unread energy sales are estimated using historical consumption patterns taking account of industry volume reconciliation processes. Revenue associated FINANCIAL STATEMENTS with business interruption insurance claims is recognised as revenue in the income statement only when it is virtually certain that the claim will be successful.

Revenue from use of energy systems includes an estimation of the volume of electricity distributed or transmitted by customers based on independently procured electricity settlement systems data. Annual revenue is dependent on being approved by the industry regulator, Ofgem. Certain circumstances may result in the regulatory ‘allowed’ income being over- or under-recovered in the financial year. Any over- or under-recovery is included into the calculation of the following year’s regulatory use of system revenue within agreed parameters. No adjustment is made for over- or under-recoveries in the year that they arise.

Where the Group has an ongoing obligation to provide services, revenues are recognised as the service is performed and amounts billed in advance are treated as deferred income and excluded from current revenue. For one-off services, such as connections, revenue is recognised at the date of service. Revenue from fixed-fee service contracts is recognised over the life of the contract, in relation to the benefit received by the customer.

Gas storage facilities revenues are recognised evenly over the contract period, whilst revenues for the injection and withdrawal of gas are recognised at the point of gas flowing into or out of the storage facilities.

Sales of goods are recognised when goods are delivered and title has passed, along with the risks and rewards of ownership. Scottish and Southern Energy 84 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

Government grants and customer contributions A government grant is recognised in the balance sheet initially as deferred income when there is reasonable assurance that it will be received and that the Group will comply with the conditions attaching to it. Grants that compensate the Group for expenses incurred are recognised in the income statement on a systematic basis in the same years in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are recognised in the income statement on a systematic basis over the useful life of the asset to match the depreciation charge. Customer contributions in respect of major connections and capital grants have been recorded as deferred income and released to the income statement over the estimated life of the related assets.

Leases The determination of whether an arrangement contains a lease is dependent on whether the arrangement relates to use and control of a specific asset. Leases are classified as finance leases if the arrangement transfers substantially all the risks and rewards of ownership to the lessee. All other leases are categorised as operating leases.

(i) Operating lease obligations Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense.

(ii) Finance lease obligations Assets held under finance leases are capitalised and held as part of property, plant and equipment. The accounting policy for such arrangements is described on page 85.

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each year during the lease term in order to produce a constant periodic rate of interest on the remaining balance of the liability.

Foreign currencies The consolidated financial statements are presented in pounds sterling, which is the functional currency of the Company and the Group’s presentational currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured accordingly.

Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Any gain or loss arising on the restatement of such items is taken to the income statement with the exception of exchange gains or losses on foreign currency borrowings that provide a hedge against a net investment in a foreign entity or exchange gains or losses incurred as part of a qualifying cash flow hedge. Exchange gains or losses on net investment hedges are taken against the consolidated translation reserve, a separate component of equity, to the extent the hedge is effective. Non-monetary assets that are measured in terms of historical cost in a foreign currency are translated at the historic rate at the date of transaction.

For the purpose of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into pounds sterling at the balance sheet closing rate. The results of these operations are translated at the average rate in the relevant period. Exchange differences on retranslation of the opening net assets and the results are transferred to the translation reserve and are reported in the statement of recognised income and expense. Exchange differences on foreign currency borrowings, foreign exchange contracts or foreign currency swaps used as part of a hedge against net investment in a foreign entity are transferred to the translation reserve.

Finance income and costs Finance income comprises interest receivable on funds invested and expected returns on pension scheme assets recognised in the income statement. Finance costs comprise interest payable on borrowings, the release of discounting on provisions, interest on pension scheme liabilities and accretion of the debt component on the convertible loan less capitalised interest.

Interest on the funding attributable to major capital projects is capitalised during the years of construction and depreciated as part of the total cost over the useful life of the asset.

Interest income and costs are recognised in the income statement as they accrue, on an effective interest method. The issue costs and interest payable on bonds and all other interest payable and receivable is reflected in the income statement on the same basis.

Taxation Taxation on the profit for the year comprises current and deferred tax. Taxation is recognised in the income statement unless it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Scottish and Southern Energy 85 Annual Report 2009

Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities other than in business combinations that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax assets and liabilities are offset where there is a legally enforceable right of offset within the same tax authority and where the Company intends to either settle them on a net basis, or to realise the asset and settle the liability simultaneously.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Dividends Dividend income is recognised on the date the Group’s right to receive payments is established.

Property, plant and equipment (i) Owned assets Items of property, plant and equipment are stated at cost less accumulated depreciation and impairments. The cost of self- constructed assets includes the cost of materials, direct labour and an appropriate proportion of other directly attributable costs. All items of property, plant and equipment are accounted for under the cost model within IAS 16.

Where an item of property, plant and equipment comprises major components having different useful lives, the components are accounted for as separate items of property, plant and equipment, and depreciated accordingly.

(ii) Leased assets Leases where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases.

Assets held under finance leases are recognised as part of the property, plant and equipment of the Group at the fair-value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs.

Benefits received and receivable as an incentive to enter into an operating lease are also allocated on a straight line basis over the lease term.

(iii) Hydro civil assets The Group is obliged under the Reservoirs Act 1975 to maintain its hydro infrastructure network, including its dams, tunnels and other hydro civil engineering structures (hydro civil assets). All items of property, plant and equipment within hydro civil assets, with the exception of land, are subject to depreciation.

In accordance with the transition provisions of IFRS 1, the Group identified the carrying value of these assets at privatisation and has treated this value as deemed cost. Following this assessment, the assets, and all subsequent enhancement and replacement expenditure, has been subject to depreciation over a useful economic life of 100 years. All subsequent maintenance expenditure is chargeable directly to the income statement. FINANCIAL STATEMENTS

(iv) Depreciation Depreciation is charged to the income statement to write off cost, less residual values, on a straight line basis over their estimated useful lives. Depreciation policy, useful lives and residual values are reviewed at least annually, for all asset classes to ensure that the current method is the most appropriate. The estimated useful lives are as follows:

Years Hydro civil assets 100 Power stations 20 to 60 Wind farm developments 20 to 25 Overhead lines, underground cables and other network assets 40 to 80 Gas storage facilities 25 to 50 Other transmission and distribution buildings, plant and equipment 10 to 45 Shop refurbishment, fixtures, equipment, vehicles and mobile plant 3 to 10 Scottish and Southern Energy 86 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

Heritable and freehold land is not depreciated.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.

(v) Subsequent expenditure It is the Group policy to capitalise qualifying replacement expenditure and depreciate it over the expected useful life of the replaced asset. Replaced assets are derecognised at this point. Where an item of property, plant and equipment is replaced and it is not practicable to determine the carrying amount of the replaced part, the cost of the replacement adjusted for inflation will be used as an approximation of the cost of the replaced part at the time it was acquired or constructed.

Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits of the item of property, plant and equipment to which it relates.

Business combinations The acquisition of subsidiaries is accounted for under the purchase method. The acquired business is measured at the date of acquisition as the aggregate fair-value of assets, liabilities and contingent liabilities as required under IFRS 3 Business Combinations excluding non-current assets (or disposal groups) that are classified as held-for-sale, which are recognised and measured at fair- value less costs to sell. The excess of the cost of acquisition over the fair-value of the acquired business is represented as goodwill.

Intangible assets (i) Goodwill and impairment testing Goodwill arising on a business combination represents the excess of the cost of acquisition over the Group’s interest in the fair-value of the identifiable assets, liabilities and contingent liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment at least on an annual basis.

For the purpose of impairment testing, goodwill is allocated to those cash-generating units expected to benefit from the combination’s synergies. The cash-generating units used for goodwill impairment testing purposes are the operating units one level below the Group’s segmental businesses or are the segments themselves. The cash-generating units are therefore representative of how goodwill was recognised and but do not represent business segments as reported to management.

If the carrying amount of the cash-generating unit exceeds its recoverable amount, an impairment charge will be recognised immediately in the income statement and will not be subsequently reversed. The recoverable amount is the higher of the cash- generating unit’s fair-value less costs to sell and its value-in-use. The impairment charge will initially be adjusted against the goodwill allocated to the cash-generating unit Thereafter, the remaining assets of the cash-generating unit will be written-down proportionately.

Goodwill may also arise upon investments in jointly-controlled entities and associates. Such goodwill is recorded within the carrying amount of the Group’s investment and any impairment loss is included within the share of result from jointly-controlled entities and associates.

On disposal or closure of a previously acquired business, any attributed goodwill will be included in determining the profit or loss on disposal.

(ii) Research and development Expenditure on research activities is charged to the income statement as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products or processes, is capitalised if the product or process is considered to be technically and commercially feasible and the Group intends to complete the intangible asset for use or for sale.

(iii) Allowances and emissions The European Emissions trading scheme (EU ETS) has been in operation since 1 January 2005. The IASB withdrew IFRIC 3 Emission Rights in June 2005 and it has not been replaced with definitive guidance or interpretation for CO2 (‘carbon’) emissions trading. The Group recognises carbon allowances granted in a period at nominal value (nil value). Carbon allowances purchased are recorded at cost within intangible assets. A liability is recognised when the forecast level of emissions in any period exceed the level of allowances held and this is recorded as a current liability. Up to the level of allowances held the liability is measured at the cost of purchased allowances. When carbon emissions liabilities are forecast to exceed the carbon allowances held, the net liability is measured at the market price of allowances. Movements in the market value of the liability are recognised in operating profit. Forward carbon contracts are measured at fair-value with gains or losses arising on re-measurement being recognised in the income statement. The intangible asset is surrendered at the end of the compliance period reflecting the consumption of the economic benefit and is derecognised at its carrying value. As a result, no amortisation is booked but an Scottish and Southern Energy 87 Annual Report 2009

impairment charge may be recognised should the carrying value exceed market value. Where allowances granted are used to settle a liability relating to a previous period, a creditor balance is recorded for the increased liability in the current period.

Under the Renewable Obligations Certificates (ROCs) scheme, certificates obtained from own generation are awarded by a third party, Ofgem. Self-generated certificates are recorded at market value and purchased certificates are recognised at cost, both within intangible assets. The liability under the renewables obligation is recognised based on electricity supplied to customers, the percentages set by Ofgem and the prevailing market price. The intangible asset is surrendered at the end of the compliance period reflecting the consumption of economic benefit. As a result no amortisation is recorded during the period.

(iv) Development wind assets Costs capitalised as development wind intangibles represent the costs incurred in bringing individual wind farm projects to the consented stage. Costs associated with reaching the consent stage include options over land rights, planning application costs and environmental impact studies. These may be costs incurred directly or part of the fair-value exercise on acquisition of a controlling interest in a project. Development wind assets are not amortised until the asset is substantially complete and ready for its intended use. The asset is subject to impairment testing on an annual basis until this time. At the point that the project reaches the consent stage and is approved by the Board, the carrying value of the project is transferred to property, plant and equipment as assets under construction. Amortisation is over the expected useful life of the related operational asset. The asset is derecognised on disposal, or when no future economic benefits are expected from their use.

(v) Other intangible assets Other intangible assets that have been acquired by the Group including brands are stated at cost less accumulated amortisation and impairment losses. Software licenses are stated at cost less accumulated amortisation. Expenditure on internally generated brands is expensed as incurred. Amortisation is charged to the income statement on a straight-line basis over the estimated useful life of these other intangible assets. The amortisation periods utilised are as follows: Years Brand values 10 Application software licences 5 Customer lists 5 Contracts Shorter of contract term or 5

Impairment testing The carrying amounts of the Group’s assets, other than inventories or deferred tax assets, are reviewed each financial year to determine whether there is any indication of impairment. If there is evidence of impairment, the recoverable amount, being the higher of the fair-value less costs to sell and the value-in-use of the asset, is estimated to determine the extent of any such impairment. For goodwill and other intangible assets with an indefinite life or not ready for use, the test for impairment is carried out annually. For financial assets, impairment is determined based on the present value of estimated future cash flows discounted at the effective rate initially used at inception.

Inventories and work in progress Inventories are valued at the lower of cost (on a first-in, first-out basis) and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of fuel stocks is based on the weighted average principle. The valuation of work in progress is based on the cost of labour, the cost of contractors, the cost of materials plus other directly attributable costs.

Recognition of revenue and profit on construction contracts Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured as the proportion of cost incurred on work performed to date compared to the estimated total contract cost, except where this would not be representative of the stage of completion. FINANCIAL STATEMENTS Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer.

When it becomes probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately in the income statement.

Employee benefi t obligations (i) Defi ned benefi t pension schemes The Group operates two defined benefit pension schemes, one of which is operated by the Company. Pension scheme assets are measured using bid market values. Pension scheme liabilities are measured using the projected unit credit actuarial method and are discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability.

Any increase in the present value of liabilities within the Group’s defined benefit pension schemes expected to arise from employee service in the year is charged as service costs to operating profit.

The expected return on the schemes’ assets and the increase during the year in the present value of the schemes’ liabilities arising from the passage of time are included in finance income and finance costs, respectively. Actuarial gains and losses are recognised in full in the consolidated statement of recognised income and expense. Pension scheme surpluses, to the extent that they are considered recoverable, or deficits are recognised in full and presented on the face of the balance sheet. Scottish and Southern Energy 88 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(ii) Defi ned contribution pension schemes The Group also operates a number of defined contribution pension schemes. The assets of the schemes are held separately from those of the Group in independently administered funds. The amounts charged represent the contributions payable to the schemes in the year and are charged directly to the income statement.

(iii) Equity and equity-related compensation benefi ts The Group operates a number of employee share schemes as described in the Remuneration Report and note 28. These schemes enable Group employees to acquire shares of the Company.

The exercise prices of the sharesave scheme are set at a discount to market price at the date of the grant. The fair-value of the sharesave scheme option granted is measured at the grant date by use of a Black-Scholes model. The fair-value of the options granted is recognised as an expense on a straight-line basis over the period that the scheme vests. Estimates are updated for non-market conditions at each balance sheet date with any adjustment in respect of the current and prior years being recognised in the income statement.

The costs associated with the other main employee schemes are recognised over the period to which they relate.

The charge related to the equity shares in the Company awarded under the share schemes is treated as an increase in the cost of investment held by the Company in the subsidiary companies of the Group. Prior year amounts are not material and have therefore not been adjusted for.

Financial instruments The Group uses a range of financial instruments to hedge exposures to financial risks, such as interest rate, foreign exchange and energy price fluctuations in its normal course of business and in accordance with the Group’s risk management policies. The Group’s risk management policies are further explained in note 29.

Accounting policies under IAS 32 and 39 (i) Interest rate and foreign exchange derivatives Financial derivative instruments are used by the Group to hedge interest rate and currency exposures. All such derivatives are recognised at fair-value and are re-measured to fair-value each reporting period. Certain derivative financial instruments are designated as being held for hedging purposes. The designation of the hedge relationship is established at the inception of the contract and procedures are applied to ensure the derivative is highly effective in achieving its objective and that the effectiveness of the hedge can be reliably measured. The treatment of gains and losses on re-measurement is dependent on the classification of the hedge and whether the hedge relationship is designated as either a ‘fair-value’ or ‘cash flow’ hedge. Derivatives that are not designated as hedges are treated as if held for trading, with all fair-value movements attributable to the risk being hedged being recorded through the income statement.

A derivative classified as a ‘fair-value’ hedge recognises gains and losses from re-measurement immediately in the income statement. Loans and borrowings are measured at cost except where they form the underlying transaction in an effective fair- value hedge relationship. In such cases, the carrying value of the loan or borrowing is adjusted to reflect fair-value movements with the gain or loss being reported in the income statement.

A derivative classified as a ‘cash flow’ hedge recognises the portion of gains or losses on the derivative which are deemed to be effective directly in equity in the hedge reserve. Any ineffective portion of the gains or losses is recognised in the Income Statement. When hedged cash flows result in the recognition of a non-financial asset or liability, the associated gains or losses previously recognised in equity are included in the initial measurement of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the consolidated income statement in the same period in which the hedged cash flows affect the consolidated income statement.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At the point of discontinuation, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the forecast transaction affects profit or loss. On settlement, the cumulative gain or loss recognised in equity is recognised in the income statement.

(ii) Commodity derivatives Within its regular course of business, the Group routinely enters into sale and purchase derivative contracts for commodities such as electricity, gas, coal and oil. Where the contract was entered into and continues to be held for the purpose of receipt or delivery in accordance with the Group’s expected sale, purchase or usage requirements, the contracts are designated as ‘own use’ contracts and are measured at cost. These contracts are not within the scope of IAS 39.

Derivative commodity contracts which are not designated as own use contracts are accounted for as trading derivatives and are recognised in the balance sheet at fair-value. Where a hedge accounting relationship is designated and is proven to be effective, the changes in fair-value will be recognised in accordance with the rules noted in part (i) to this note. Scottish and Southern Energy 89 Annual Report 2009

Other commodity contracts, where own use is not established and a hedge accounting relationship is not designated, are measured at fair-value with gains and losses on re-measurement being recognised in the income statement in cost of sales.

(iii) Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives where the characteristics of the derivatives are not closely related to those of the host contracts.

(iv) Net investment hedges Hedges of net investments in foreign operations are accounted for in a manner similar to cash flow hedges. Any gain or loss on the effective portion of the hedge is recognised in equity, in the translation reserve, and any gain or loss on the ineffective portion of the hedge is recognised in the income statement. On disposal of the foreign operation, the cumulative value of any gains or losses recognised directly in equity is transferred to the income statement.

(v) Convertible bond The Group has issued a convertible bond which represents debt that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair-value. This is accounted for as a compound financial instrument, net of transaction costs. The equity component of the convertible bond is calculated as the excess of the issue proceeds over the present value of the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The interest expense recognised in the income statement is calculated using the effective interest method.

(vi) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

(vii) Trade receivables Trade receivables do not carry any interest and are measured at cost less an appropriate allowance for irrecoverable receivables.

(viii) Interest-bearing loans and borrowings All such loans and borrowings are initially recognised at fair-value including transaction costs and are subsequently measured at amortised cost, except where the loan or borrowing is the hedged item in an effective fair-value hedge relationship.

(ix) Share capital Ordinary shares are accounted for as equity. Costs associated with the issue of new shares are deducted from the proceeds of issue.

Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Decommissioning costs The estimated cost of decommissioning at the end of the useful lives of certain assets is reviewed periodically. Provision is made for the estimated cost of decommissioning. Decommissioning dates are uncertain but are expected to be between 2009 and 2035. A corresponding decommissioning asset is recognised and is included within property, plant and equipment. Changes in these provisions are recognised prospectively. The unwinding of the discount on the provision is included in finance costs and the depreciation for the asset is straight-line over the expected useful life of the asset. FINANCIAL STATEMENTS

Critical accounting judgements and key sources of estimation uncertainty In the process of applying the Group’s accounting policies, management necessarily makes judgements and estimates that have a significant effect on the amounts recognised in the financial statements. Changes in the assumptions underlying the estimates could result in a significant impact to the financial statements. The most critical of these accounting judgement and estimation areas are noted.

(i) Revenue recognition Revenue on energy sales includes an estimate of the value of electricity or gas supplied to customers between the date of the last meter reading and the year end. This will have been estimated by using historical consumption patterns and takes into consideration industry reconciliation processes for total consumption by supplier. At the balance sheet date, the estimated consumption by customers will either have been billed (estimated billed revenue) or accrued (unbilled revenue). Management apply judgement to the measurement of the quantum of the estimated consumption and to the valuation of that consumption. The judgements applied, and the assumptions underpinning these judgements are considered to be appropriate. However, a change in these assumptions would impact upon the amount of revenue recognised. Scottish and Southern Energy 90 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(ii) Retirement benefi ts The assumptions in relation to the cost of providing post-retirement benefits during the period are set after consultation with qualified actuaries. While these assumptions are believed to be appropriate, a change in these assumptions would impact the earnings of the Group. The value of scheme assets is impacted by the asset ceiling test which restricts the surplus that can be recognised to assets that can be recovered fully through refunds or reductions in future contributions.

(iii) Impairment testing The Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that the value of those assets is impaired. In assessing for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash generating unit (CGU). The recoverable amount of the assets, or the appropriate CGU, is measured as the higher of their fair-value less costs to sell and value in use. Value in use calculations requires the estimation of future cash flows to be derived from the respective CGUs and to select and an appropriate discount rate in order to calculated their present value. The fair-values less costs to sell methodology used for the wind farms CGUs also requires the discounting of cash flows from the projects within the respective CGUs. The estimation of the timing and value of underlying projected cash flows and the selection of appropriate discount rates involves management judgement. Subsequent changes to these estimates or judgements may impact the carrying value of the assets within the respective CGUs.

(iv) Provisions and contingencies The assessments undertaken in recognising provisions and contingencies have been made in accordance with IAS 37. The evaluation of the likelihood of the contingent events has required best judgement by management regarding the probability of exposure to potential loss. Should circumstances change following unforeseeable developments, this likelihood could alter.

(v) Financial Instruments – fair-values The valuation of the financial instruments is based upon published price quotations in active markets and valuation techniques where such information is not available. Energy commodity contracts are classified as either derivative contracts under IAS 39 or as contracts for the Group’s own use requirements. Only IAS 39 derivatives are accounted for on a fair-value basis. More detail on this is included in note 29.

(vi) Exceptionals and re-measurements The criteria for identifying what constitutes an exceptional item are outlined in note 1 Exceptional Items and Certain Re-measurements.

2. CHANGE IN ACCOUNTING POLICY

Intangible assets – allowances and emissions In the financial statements up to 31 March 2008, the policy in relation to CO2 (‘carbon’) allowances granted was to recognise these allowances as a current intangible asset at fair-value at the date of grant. Carbon emissions liabilities were measured at the cost of purchased or granted allowances up to the level of allowances held. As a consequence, to the extent that granted allowances assets were recognised, an equal and opposite component of the emissions liability was recognised.

In the current year, the Group has ceased to recognise granted allowances at fair-value and instead records these at nominal value (nil value). This change has been made to simplify disclosures in relation to the EU ETS and will bring the Group in line with the emerging consensus on treatment of granted allowances.

This change in accounting policy has nil effect on reserves. The restatements to the comparative year balance sheet are as follows:

Impact of change in disclosure: 31 March 2008 31 March 2007 £m £m Other intangible assets 597.8 190.6 Less: restatement (202.0) (19.2) 395.8 171.4

Other creditors (910.4) (526.1) Less: restatement 202.0 19.2 (708.4) (506.9)

Impact on reserves – –

Other restated amounts In addition, within the notes to the financial statements, certain items have been reclassified to enhance understanding of the prior year results and to aid comparability with the current year presentation. Certain provisional fair-value estimates in relation to acquisitions in the previous year have been agreed and are reflected in the current year. These have no impact on equity or the income statement. Scottish and Southern Energy 91 Annual Report 2009

3. SEGMENTAL INFORMATION

Primary reporting format – business segments The primary segments are as reported for management purposes and reflect the day-to-day management of the business. The Group’s primary segments are the distribution and transmission of electricity in the north of Scotland, the distribution of electricity in the south of England (together referred to as Power Systems) and the generation and supply of electricity and sale of gas in Great Britain and Ireland (Generation and Supply). The Group‘s 50% equity share in Scotia Gas Networks Limited, a business which distributes gas in Scotland and the south of England (see note 13) is included as a separate business segment where appropriate due to its significance.

Analysis of revenue, operating profit, assets, liabilities and other items by segment is provided below. All revenue and profit before taxation arise from operations within Great Britain, Ireland and mainland Europe.

(a) Revenue by segment Total revenue Intra-segment revenue (i) External revenue 2009 2008 2009 2008 2009 2008 £m £m £m £m £m £m Power Systems Scotland 292.1 283.6 104.1 108.4 188.0 175.2 England 450.9 434.0 204.1 194.6 246.8 239.4 743.0 717.6 308.2 303.0 434.8 414.6 Generation and Supply Retail 8,516.5 5,648.6 8.2 7.0 8,508.3 5,641.6 Wholesale and trading 15,409.4 8,353.9 – – 15,409.4 8,353.9 Other 440.7 260.5 20.7 6.1 420.0 254.4 24,366.6 14,263.0 28.9 13.1 24,337.7 14,249.9

Other businesses 1,077.2 1,017.8 425.5 426.0 651.7 591.8 26,186.8 15,998.4 762.6 742.1 25,424.2 15,256.3

(i) Intra-segment revenue is derived from use of system income received by the Power Systems businesses from Generation and Supply, provision of Contracting, Metering and Connections services, use of Gas Storage facilities, Telecoms infrastructure charges, internal heat and light charges and other Corporate services. All are provided at arm’s length basis.

Revenue within Generation and Supply includes retail sales from energy supply customers, wholesale and trading revenue and other sales. Wholesale and trading revenue includes revenues from generation plant output and the gross value of all wholesale power and gas sales including settled physical and financial trades. These are entered into to optimise the performance of the generation plants and to support the energy supply business. Purchase trades are included in cost of sales.

Revenue from the Group’s investment in Scotia Gas Networks (SSE share being 2009 – £365.7m; 2008 – £361.2m) is not recorded in the revenue line in the income statement.

(b) Operating profit by segment 2009 2008 Before Before JCE/ exceptional Exceptional JCE/ exceptional Exceptional Associate items and items and Associate items and items and share of certain certain share of certain certain interest re-measure- re-measure- interest re-measure- re-measure­

Adjusted and tax (i) ments ments Total Adjusted and tax (i) ments ments Total FINANCIAL STATEMENTS £m £m £m £m £m £m £m £m £m £m Power Systems Scotland 160.4 – 160.4 – 160.4 150.2 – 150.2 – 150.2 England 243.3 – 243.3 – 243.3 232.7 – 232.7 – 232.7 403.7 – 403.7 – 403.7 382.9 – 382.9 – 382.9 Scotia Gas Networks 180.5 (146.3) 34.2 3.9 38.1 161.5 (139.3) 22.2 30.3 52.5 Energy Systems 584.2 (146.3) 437.9 3.9 441.8 544.4 (139.3) 405.1 30.3 435.4 Generation and Supply 832.0 (20.9) 811.1 (1,190.2) (379.1) 711.1 (29.9) 681.2 (182.7) 498.5 Other businesses 134.1 (0.3) 133.8 – 133.8 137.8 (0.3) 137.5 55.0 192.5 1,550.3 (167.5) 1,382.8 (1,186.3) 196.5 1,393.3 (169.5) 1,223.8 (97.4) 1,126.4 Unallocated expenses (ii) (8.9) – (8.9) – (8.9) (9.8) – (9.8) – (9.8) 1,541.4 (167.5) 1,373.9 (1,186.3) 187.6 1,383.5 (169.5) 1,214.0 (97.4) 1,116.6

(i) The adjusted operating profit of the Group is reported after removal of the Group’s share of interest, fair-value movements on financing derivatives and tax from jointly controlled entities and associates. The share of Scotia Gas Networks interest includes loan stock interest payable to the consortium shareholders. The Group has accounted for its 50% share of this, £33.6m (2008 – £35.4m), as finance income (note 7). (ii) Unallocated expenses comprise corporate office costs which are not directly allocable to particular segments. Scottish and Southern Energy 92 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

3. SEGMENTAL INFORMATION (continued)

The Group’s share of operating profit from jointly controlled entities and associates has been recognised in the Generation and Supply segment other than that for Scotia Gas Networks Limited, which is recorded in a separate segment, and PriDE (South East Regional Prime), which is recognised in Other businesses (£1.4m before tax; 2008 – £1.0m before tax).

(c) Assets and liabilities Segment assets (i) Segment liabilities (ii) 2009 2008 2009 2008 £m £m £m £m Power Systems Scotland 1,621.7 1,495.2 953.4 931.8 England 2,479.6 2,335.4 1,490.2 1,461.2 4,101.3 3,830.6 2,443.6 2,393.0 Scotia Gas Networks (iii) 424.5 501.1 – – Energy Systems 4,525.8 4,331.7 2,443.6 2,393.0

Generation and Supply 16,069.8 12,312.7 16,244.8 11,435.1 Other businesses 1,640.8 1,843.9 1,236.5 1,429.5 Corporate and unallocated 12,763.6 9,910.7 12,100.2 10,161.1 35,000.0 28,399.0 32,025.1 25,418.7 Less: inter-segment (17,230.7) (14,625.0) (17,230.7) (14,625.0) 17,769.3 13,774.0 14,794.4 10,793.7

(i) Segment assets consist of property, plant and equipment, goodwill, other intangible assets, financial assets (operating derivatives) and receivables. Unallocated assets include pension assets, deferred tax assets, financial assets (financing derivatives), investments and cash and cash equivalents. (ii) Segment liabilities consist of operating liabilities. Unallocated liabilities include taxation, corporate borrowings, pension liabilities and deferred taxation. (iii) The asset balance represents the Group’s net investment in Scotia Gas Networks. The Group’s share of the capital additions in Scotia Gas Networks is not included within Property, Plant and Equipment.

(d) Capital expenditure Capital additions Capital additions to to property, plant intangible assets and equipment (note 11) (note 12) 2008 2009 restated 2009 2008 £m £m £m £m Power Systems Scotland – – 128.9 100.0 England – – 185.7 164.4 – – 314.6 264.4

Generation and Supply 351.3 163.2 757.6 351.9 Other businesses – 3.4 218.6 165.9 Corporate and unallocated 2.4 10.7 – – 353.7 177.3 1,290.8 782.2

Capital additions does not include assets acquired in acquisitions. Scottish and Southern Energy 93 Annual Report 2009

(e) Included within operating profit Depreciation/ Amortisation/ impairment on property, impairment of intangible plant and equipment (note 12) assets (note 11) 2009 2008 2009 2008 £m £m £m £m Power Systems Scotland 45.2 40.5 – – England 75.2 68.8 – – 120.4 109.3 – –

Generation and Supply 142.7 118.2 4.8 9.7 Other businesses 52.8 40.3 5.5 – Corporate and unallocated – – 4.1 4.0 315.9 267.8 14.4 13.7

The Group’s share of Scotia Gas Networks depreciation (2009 – £52.1m; 2008 – £46.0m) and amortisation (2009 – nil; 2008 – nil) is not included within operating costs. Property, plant and equipment impairment charges of nil (2008 – £12.2m) are included within Generation and Supply.

Secondary reporting format – geographical segments The Group operates in two main geographical areas: 2009 2008 UK Europe Total UK Europe Total £m £m £m £m £m £m Revenue – external 25,045.7 378.5 25,424.2 15,183.4 72.9 15,256.3 Total assets (i) 16,592.4 1,176.9 17,769.3 12,583.6 1,190.4 13,774.0 Capital expenditure (ii) 1,158.7 132.1 1,290.8 778.1 4.1 782.2 Expenditure on intangible assets (iii) 321.7 32.0 353.7 174.8 2.5 177.3

(i) Based on location of assets. (ii) Capital expenditure on property, plant and equipment (note 12) based on location of assets. (iii) Capital expenditure on other intangible assets (note 11) based on location of assets.

4. OTHER OPERATING INCOME AND EXPENSE

Group operating costs can be analysed thus: 2009 2008 £m £m Distribution costs 205.3 214.6 Administration costs 371.2 391.1 576.5 605.7

Group operating profit is stated after charging (or crediting) the following items: 2009 2008

£m £m FINANCIAL STATEMENTS Depreciation and impairment of property, plant and equipment (note 12) 315.9 267.8 Impairment of inventories (note 16) 8.2 – Research and development costs 4.4 3.7 Operating lease rentals (note 31) 220.6 268.9 Release of deferred income in relation to customer contributions and capital grants (16.7) (15.1) Gain on disposal of property, plant and equipment (i) (2.0) (65.3) Gain on disposal of fixed asset investments (2.2) – Loss on disposal of replaced assets 0.3 0.4 Impairment of intangible asset (note 11) 2.2 2.0 Amortisation of brand costs (note 11) 1.1 1.1 Amortisation of intangible assets (note 11) 11.1 4.2

(i) The prior year gain on disposal of property, plant and equipment includes the exceptional gain on disposal. Scottish and Southern Energy 94 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

4. OTHER OPERATING INCOME AND EXPENSE (continued)

Auditor’s remuneration 2009 2008 £m £m Statutory audit services – audit of the Group’s accounts 0.2 0.2 Statutory audit of subsidiary accounts 0.6 0.4 Audit of parent and subsidiary entities 0.8 0.6

Tax services 0.4 0.1 Other services 0.4 0.9

Tax service fees incurred in the year were £0.4m (2008 – £0.1m). In addition to the amounts shown above, the auditor received fees of £0.04m (2008 – £0.03m) for the audit of the Scottish Hydro-Electric Pension Scheme. Statutory audit of subsidiary accounts includes £0.3m (2008 – £0.2m) in relation to Airtricity. Other service fees include fees incurred in relation to potential acquisitions and work in relation to regulatory accounts and returns required by Ofgem. A description of the work of the Audit Committee is set out on page 58 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditor.

Amounts paid to the Company’s auditor in respect of services to the Company other than the audit of the Company’s financial statements have not been disclosed separately as the information is required instead to be disclosed on a consolidated basis.

5. EXCEPTIONAL ITEMS AND CERTAIN RE-MEASUREMENTS

(i) Exceptional items During the year, the Group disposed of 50% of its equity shareholding in Greater Gabbard Offshore Winds Limited (GGOWL) to RWE npower renewables Limited, the UK fully owned subsidiary of RWE Innogy GmbH for a total cash consideration of £308.5m.

GGOWL was originally a jointly controlled entity between Airtricity, acquired by SSE in February 2008, and Fluor International Limited. In May 2008, SSE acquired Fluor’s 50% stake for a cash consideration of £40.0m, while stating its intention to dispose of it later in the year.

The total proceeds on disposal was £308.5m, which comprised £165.6m reimbursement of 50% of the capital costs already incurred in developing the project and £142.9m in relation to the 50% of the equity. The gain on sale recognised was £102.7m, which has been disclosed separately in the income statement as an exceptional item. While no tax charge was recognised in relation to the gain on disposal, a tax credit was recognised on the reversal of deferred tax related to the derecognition of fair-value items deemed to have been part of the costs of disposal (£5.7m). Further detail on this transaction is included at note 15.

In the previous financial year, the Group disposed of telecoms sites assets to the Wireless Infrastructure Company Limited, for a consideration of £79.0m. The gain recognised on this disposal was £55.0m. This gain has been disclosed separately in the income statement. Also in the previous financial year, the Group incurred an unhedged translation loss of £22.2m on € denominated debt held in relation to the acquisition of Airtricity Holdings Limited (see note 15). This has been recognised as exceptional following the Group’s decision to restructure the borrowings associated with this element of the acquisition in order to match sterling exposures with sterling funding. As a consequence this translation loss was a non-recurring item.

(ii) Certain re-measurements Certain re-measurements arising from IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group. This category includes the movement on derivatives as described in note 29.

(iii) Taxation The Group has separately recognised the tax effect of the exceptional items and certain re-measurements summarised above.

In addition to this, the Group has also separately disclosed in the previous financial year the effect of the change in the base corporation tax rate of 30% to 28%, which was effective from 1 April 2008. This had an impact on any temporary differences which existed at 1 April 2008 (note 8). Scottish and Southern Energy 95 Annual Report 2009

These transactions can be summarised thus: 2009 2008 £m £m Exceptional items Gain on disposal of share in Greater Gabbard Offshore Winds (note 15) 102.7 – Disposal of telecoms masts assets – 55.0 Share of change in corporation tax in jointly controlled entities and associates – 32.4 Exceptional loss on translation – (22.2) 102.7 65.2 Certain re-measurements Movement on operating derivatives (1,291.7) (187.8) Movement on financing derivatives 25.8 20.7 Share of movement on derivatives in jointly controlled entities (net of tax) 2.7 3.0 (1,263.2) (164.1) (Loss)/profit before taxation (1,160.5) (98.9)

Exceptional items Effect of change in corporation tax on deferred tax liabilities and assets – 55.4 Taxation on other exceptional items 5.7 (9.9) 5.7 45.5 Taxation on certain re-measurements 353.9 50.7 Taxation 359.6 96.2

Impact on profit for the year (800.9) (2.7)

6. DIRECTORS AND EMPLOYEES

(i) Employee costs Consolidated 2009 2008 £m £m Employee costs: Wages and salaries 530.1 433.1 Social security costs 48.0 38.9 Share-based remuneration (note 28) 14.3 10.8 Pension costs (note 27) 35.4 36.3 627.8 519.1 Less: capitalised as property, plant and equipment (79.9) (60.9) 547.9 458.2

Employee numbers: Consolidated Company 2009 2008 2009 2008 Number Number Number Number FINANCIAL STATEMENTS Numbers employed at 31 March 18,795 16,892 4 4

The average number of people employed by the Group (including Executive Directors) during the year was:

Consolidated Company 2009 2008 2009 2008 Number Number Number Number Power Systems 2,045 1,938 – – Generation and Supply 8,536 7,047 – – Contracting, Connections and Metering 5,714 5,312 – – Other businesses and corporate services 1,901 1,480 4 4 18,196 15,777 4 4

The costs associated with the employees of the Company, who are the executive Directors of the Group, are borne by Group companies. No amounts are charged to the Company. Scottish and Southern Energy 96 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

6. DIRECTORS AND EMPLOYEES (continued)

(ii) Directors’ remuneration and interests Information concerning Directors’ remuneration, shareholdings, options, long term incentive schemes and pensions is shown in the Remuneration Report on pages 66 to 75. No Director had, during or at the end of the year, any material interest in any other contract of significance in relation to the Group’s business.

7. FINANCE INCOME AND COSTS

Recognised in income statement 2009 2008

Before Before exceptional Exceptional exceptional Exceptional items and certain items and certain items and certain items and certain re-measurements re-measurements Total re-measurements re-measurements Total £m £m £m £m £m £m Finance income: Return on pension scheme assets 135.3 – 135.3 141.4 – 141.4 Interest income from short term deposits 9.4 – 9.4 4.9 – 4.9 Other interest receivable: Scotia Gas Networks loan stock 33.6 – 33.6 35.4 – 35.4 Other jointly controlled entities and associates 14.6 – 14.6 10.8 – 10.8 Other receivable 16.8 – 16.8 10.1 – 10.1 Total finance income 209.7 – 209.7 202.6 – 202.6

Finance costs: Bank loans and overdrafts (149.9) – (149.9) (52.5) – (52.5) Other loans and charges (132.9) – (132.9) (81.2) – (81.2) Interest on pension scheme liabilities (130.1) – (130.1) (117.4) – (117.4) Accretion of convertible debt component (note 22) (0.6) – (0.6) (4.6) – (4.6) Notional interest arising on discounted provisions (5.1) – (5.1) (3.6) – (3.6) Foreign exchange translation of monetary assets and liabilities (2.4) – (2.4) 2.1 (22.2) (20.1) Less: interest capitalised (i) 51.2 – 51.2 23.3 – 23.3

Total finance costs (369.8) – (369.8) (233.9) (22.2) (256.1) Changes in fair-value of financing derivative assets or liabilities designated at fair-value through profit or loss – 25.8 25.8 – 20.7 20.7

Net finance costs (160.1) 25.8 (134.3) (31.3) (1.5) (32.8)

Finance income 209.7 – 209.7 202.6 – 202.6 Finance costs (369.8) 25.8 (344.0) (233.9) (1.5) (235.4)

Net finance costs (160.1) 25.8 (134.3) (31.3) (1.5) (32.8)

(i) The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 5.46% (2008 – 5.52%).

Recognised in equity 2009 2008 £m £m Gains on effective portion of cash flow hedges (i) 21.7 27.2 Share of gains/(losses) on effective portion of cash flow hedges (i) 8.4 (9.5) 30.1 17.7

(i) Before deduction of tax. Scottish and Southern Energy 97 Annual Report 2009

Adjusted net finance costs are arrived at after the following adjustments: 2009 2008 £m £m Net finance costs (134.3) (32.8) (add)/less: Share of interest from jointly controlled entities and associates Scotia Gas Networks loan stock (33.6) (35.4) Other jointly controlled entities and associates (94.6) (92.2) (128.2) (127.6) Accretion of convertible debt component (note 22) 0.6 4.6 Ineffective portion of movement on net investment hedge – 22.2 Movement on financing derivatives (25.8) (20.7) Adjusted finance income and costs (287.7) (154.3) (add)/less: Return on pension scheme assets (135.3) (141.4) Interest on pension scheme liabilities 130.1 117.4 Notional interest arising on discounted provisions 5.1 3.6 Adjusted finance income and costs for interest cover calculations (287.8) (174.7)

8. TAXATION

Analysis of charge recognised in the income statement: 2009 2008

Before Before exceptional Exceptional exceptional Exceptional items and certain items and certain items and certain items and certain re-measurements re-measurements Total re-measurements re-measurements Total £m £m £m £m £m £m Current tax UK corporation tax 298.6 – 298.6 315.3 13.6 328.9 Adjustments in respect of previous years (10.1) – (10.1) (18.9) – (18.9) Total current tax 288.5 – 288.5 296.4 13.6 310.0 Deferred tax Current year 13.8 (359.6) (345.8) 11.4 (54.4) (43.0) Effect of UK corporation tax rate change – – – – (55.4) (55.4) Adjustments in respect of previous years (1.7) – (1.7) (1.0) – (1.0) Total deferred tax 12.1 (359.6) (347.5) 10.4 (109.8) (99.4)

Total taxation charge/(credit) 300.6 (359.6) (59.0) 306.8 (96.2) 210.6

The charge/(credit) for the year can be reconciled to the profit per the income statement as follows:

2009 2009 2008 2008 FINANCIAL STATEMENTS £m % £m % Group profit before tax 53.3 1,083.8 Less: share of results of associates and jointly controlled entities (81.6) (108.5) (Loss)/profit before tax (28.3) 975.3 Tax on (loss)/profit on ordinary activities at standard UK corporation tax rate of 28% (2008 – 30%) (7.9) 28.0 292.6 30.0 Tax effect of: Expenses not deductible for tax purposes 3.7 (13.1) 5.6 0.6 Non-taxable income (34.4) 121.5 (0.4) – Effect of change of UK corporation tax rate – – (55.4) (5.7) Impact of foreign tax rates and foreign dividends 0.3 (1.1) (0.6) (0.1) Adjustments to tax charge in respect of previous years (11.8) 41.7 (21.0) (2.1) Consortium relief not paid for (9.1) 32.2 (9.7) (1.0) Utilisation of tax losses (1.5) 5.3 (0.5) (0.1) Other items 1.7 (6.0) – – Group tax (credit)/charge and effective rate (59.0) 208.5 210.6 21.6 Scottish and Southern Energy 98 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

8. TAXATION (continued)

The adjusted current tax charge is arrived at after the following adjustments: 2009 2009 2008 2008 £m % £m % Total taxation (credit)/charge (59.0) 208.5 210.6 21.6 Effect of adjusting items (see below) – (213.2) – (4.5) Total taxation (credit)/charge on adjusted basis (59.0) (4.7) 210.6 17.1 (add)/less: Share of current tax from jointly controlled entities and associates 11.9 1.0 20.8 1.7 Exceptional items 5.7 0.5 (9.9) (0.8) Effect of change of UK corporation tax rate – – 55.4 4.5 Tax on movement on derivatives 353.9 28.2 50.7 4.1 Deferred tax (excluding share of jointly controlled entities) (12.1) (1.0) (10.4) (0.8) Adjusted current tax charge and effective rate 300.4 24.0 317.2 25.8

The adjusted effective rate is based on adjusted profit before tax being: 2009 2008 £m £m Profit before tax 53.3 1,083.8 add: Exceptional items and certain re-measurements 1,160.5 98.9 Share of tax from jointly controlled entities and associates 39.3 41.9 Accretion of convertible debt component (note 22) 0.6 4.6 Adjusted profit before tax 1,253.7 1,229.2

In the year ended 31 March 2008, it was confirmed that the corporation tax rate applicable to the Group’s UK businesses would change from 30% to 28% from 1 April 2008. Temporary differences which existed at 1 April 2008 will reverse at 28% rather than 30%, which was the basis at 31 March 2007. Consequently, the Group recognised the following credits in respect of this in the period to 31 March 2008:

£m Adjustments recognised in Income Statement in respect of Group entities 55.4 Adjustments recognised in Equity in respect of Group entities (2.4) 53.0 Share of adjustments recognised in Income Statement in joint ventures and associates 32.4 Share of adjustments recognised in Equity in joint ventures and associates (0.5) 84.9

Tax charge/(credit) recognised directly in equity 2009 2008 £m £m Relating to: Pension scheme actuarial movements (78.1) (7.2) Cash flow and net investment hedge movements (34.5) (1.9) Share based payments 2.7 0.1 Convertible bond – (1.8) Change in UK corporation tax rate – 2.4 (109.9) (8.4)

All tax recognised directly in equity is deferred tax other than £(0.5)m (2008 – £(0.8)m) current tax relating to employee share awards. Scottish and Southern Energy 99 Annual Report 2009

9. DIVIDENDS 2009 2008 £m £m Amounts recognised as distributions from equity: Final dividend for the previous year of 42.4p (2008 – 39.9p) per share 370.0 345.5 Interim dividend for the current year of 19.8p (2008 – 18.1p) per share 181.9 157.3 551.9 502.8

Proposed final dividend for the current year of 46.2p (2008 – 42.4p) per share 425.2 368.9

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The final dividend paid for the previous year, £370.0m (42.4p, 2008 – 39.9p), was declared on 29 May 2008, approved at the Annual General Meeting on 24 July 2008 and was paid to shareholders on 26 September 2008. An interim dividend for the current year, £181.9m (19.8p, 2008 – 18.1p), was paid on 27 March 2009.

10. EARNINGS PER SHARE

Basic earnings per share The calculation of basic earnings per share at 31 March 2009 is based on the net profit attributable to equity shareholders and a weighted average number of ordinary shares outstanding during the year ended 31 March 2009. All earnings are from continuing operations.

Adjusted earnings per share Adjusted earnings per share has been calculated by excluding the charge for deferred tax, net finance income relating to pensions, items disclosed as exceptional, and the impact of IAS 39. Year ended Year ended Year ended 31 March Year ended 31 March 31 March 2009 31 March 2008 2009 Earnings 2008 Earnings Earnings per share Earnings per share £m pence £m pence Basic 112.3 12.7 872.9 101.1 Exceptional items and certain re-measurements (note 5) 800.9 90.7 2.7 0.3 Basic excluding exceptional items and certain re-measurements 913.2 103.4 875.6 101.4 Adjusted for: Deferred tax (note 8) 12.1 1.4 10.4 1.2 Deferred tax from share of jointly controlled entities and associates results 27.4 3.1 21.1 2.5 Accretion of convertible debt component (note 7) 0.6 0.1 4.6 0.5 Adjusted 953.3 108.0 911.7 105.6

Basic 112.3 12.7 872.9 101.1 Convertible debt interest (net of tax) 1.2 0.1 9.8 1.1 Dilutive effect of convertible debt – – – (1.2) Diluted 113.5 12.8 882.7 101.0 Exceptional items and certain re-measurements 800.9 90.5 2.7 0.3 914.4 103.3 Diluted excluding exceptional items and certain re-measurements 885.4 101.3 FINANCIAL STATEMENTS

The weighted average number of shares used in each calculation is as follows: 31 March 2009 31 March 2008 Number of shares Number of shares (millions) (millions) For basic and adjusted earnings per share 883.0 863.2 Effect of exercise of share options 0.8 2.0 883.8 865.2 Effect of dilutive convertible debt 1.7 8.8 For diluted earnings per share 885.5 874.0 Scottish and Southern Energy 100 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

11. INTANGIBLE ASSETS

Consolidated Allowances and certificates Development Wind farm Other Total Goodwill restated assets developments Brands intangibles restated (i) (ii) (iii) (iv) (v) £m £m £m £m £m £m £m Cost: At 1 April 2007 reported 293.2 231.6 1.4 – 9.0 19.7 554.9 Restatement (note 2) – (73.1) – – – – (73.1) At 1 April 2007 restated 293.2 158.5 1.4 – 9.0 19.7 481.8 Additions 1.1 157.0 – 6.2 – 13.0 177.3 Acquisitions (note 15) 344.8 – – 223.7 2.2 14.2 584.9 Transfer to property, plant and equipment (note 12) – – – (20.4) – – (20.4) Disposals – (170.2) (1.4) – – – (171.6) Exchange adjustments 19.9 – – 13.2 0.2 0.4 33.7 At 31 March 2008 659.0 145.3 – 222.7 11.4 47.3 1,085.7 Prior year acquisitions (note 15) 1.2 – – 1.1 – 8.8 11.1 Additions – 318.0 – 33.3 – 2.4 353.7 Acquisitions (note 15) 22.0 – – 147.9 – 169.9 Transfer to property, plant and equipment (note 12) – – – (213.0) – – (213.0) Disposals (17.4) (243.0) – – – – (260.4) Exchange adjustments 59.2 – – 28.3 0.4 1.3 89.2 At 31 March 2009 724.0 220.3 – 220.3 11.8 59.8 1,236.2

Aggregate amortisation and impairment: At 1 April 2007 reported – (53.9) – – (2.6) (14.6) (71.1) Restatement (note 2) – 53.9 – – – – 53.9 At 1 April 2007 – – – – (2.6) (14.6) (17.2) Charge for the year – (6.4) – (2.0) (1.1) (4.2) (13.7) At 31 March 2008 – (6.4) – (2.0) (3.7) (18.8) (30.9) Charge for the year – – – (2.2) (1.1) (11.1) (14.4) At 31 March 2009 – (6.4) – (4.2) (4.8) (29.9) (45.3)

Carrying amount: At 31 March 2009 724.0 213.9 – 216.1 7.0 29.9 1,190.9 At 31 March 2008 659.0 138.9 – 220.7 7.7 28.5 1,054.8 At 1 April 2007 293.2 158.5 1.4 – 6.4 5.1 464.6

The Group does not hold any intangible assets with indefinite lives.

Intangible assets have been analysed as current and non-current as follows: 2009 2008 £m £m Current 213.9 138.9 Non-current 977.0 915.9 1,190.9 1,054.8

(i) Allowances and certificates Allowances and certificates consist of purchased carbon emissions allowances and generated or purchased Renewable Obligations Certificates (ROCs). The accounting policy in relation to granted carbon emissions allowances has been changed from that applied in the previous financial year (see note 2).

(ii) Development assets Development costs relate to the design, construction and testing of renewable generation devices which the Group believes will generate probable future economic benefits. Scottish and Southern Energy 101 Annual Report 2009

(iii) Wind farm developments Costs capitalised as development wind intangibles including options over land rights represent the costs incurred in bringing individual wind farm projects to the consented stage. Costs associated with reaching the consent stage include planning application costs and environmental impact studies. These may be costs incurred directly or at cost as part of the fair-value exercise on acquisition of a controlling interest in a project. At the point the development reaches the consent stage and is approved for construction, the carrying value is transferred to Property, Plant and Equipment (note 12). At the point a project is no longer expected to reach the consent stage, the carrying amount of the project is impaired. The acquisitions in the year includes all items in note 15 including the investment in the Greater Gabbard Offshore Winds joint venture at 14 May 2008.

(iv) Brands Included within brands are the acquired brands of Atlantic Electric and Gas and the Airtricity supply brand used in Ireland. The Group have assessed the economic life of brands to be 10 years and the brands are being amortised over this period. The charge is reported as part of operating costs.

(v) Other intangible assets Included within other intangible assets are customer lists, contracts, application software licence fees, software development work, software upgrades and purchased PC software packages. Amortisation is over the shorter of the contract term or five years.

The Company does not hold intangible assets.

Impairment review of goodwill Goodwill is allocated to those cash-generating units (CGUs) expected to benefit from the respective business combination for impairment testing purposes. Certain goodwill valuations have changed in the current year following agreement of final fair valuations attributable to business combinations concluded in the previous financial year. In particular, the goodwill recognised on the Airtricity acquisition has been allocated to different CGUs from those disclosed on a provisional basis in the previous year. This followed a more detailed consideration of the goodwill recognised and its origin. A summary of the change from provisional to final valuations on the previous year acquisitions is included in note 15. Consequently, the allocation of goodwill to the identified CGUs associated with the Airtricity group has been restated to more accurately reflect where goodwill is expected to arise through the strategic development of the respective portfolios.

A summary of the goodwill allocated to CGUs and the group’s primary operating segments is presented below: 2008 2009 restated Cash-generating unit Operating segment £m £m Ireland wind farms Generation and Supply 164.4 138.4 UK wind farms Generation and Supply 241.0 200.0 European wind farms Generation and Supply 24.3 19.8 UK Supply Generation and Supply 187.0 187.0 UK Generation Generation and Supply 40.0 42.7 Gas Storage Other Businesses 56.2 56.2 Other (i) Other Businesses 11.1 14.9 724.0 659.0

(i) Represents goodwill balances across a number of business units. The amount of goodwill allocated to these units is not significant compared to the aggregate carrying value of the business units or the aggregate value of goodwill held by the Group. This represents a change in presentation from the previous year. The conclusion of the impairment tests conducted is that no impairment is required. FINANCIAL STATEMENTS FINANCIAL STATEMENTS The recoverable amount of the UK Supply, UK Generation, Gas Storage and Other CGUs is determined by reference to value-in-use calculations. These calculations, as a starting point, use pre-tax cash flow projections based on the Group’s five year business model which has been approved by the board. The Group’s business model is based on past experience and reflects the Group’s view of markets, prices, risks and its strategic objectives. Commodity prices used are based on observable market data and, where this is not available, on internal estimates. The recoverable amount of the Airtricity wind farm CGUs is based on the fair-value less costs to sell methodology. The basis applied has been deemed appropriate as it is consistent with the way in which the economic value of the individual CGUs is assessed by management and would be by other market participants. The method applied is to determine fair-value by assessing the discounted pre-tax cash flows expected to be earned by the individual wind farm projects within the respective CGUs. The three identified CGUs (Ireland wind farms, UK wind farms, European wind farms) share many of the same risk factors and are discounted accordingly. Scottish and Southern Energy 102 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

11. INTANGIBLE ASSETS (continued)

The key assumptions used for the main value-in-use calculations are as follows: 2009 and 2008 2009 2008 Cash flow Discount rate Discount rate projection Cash-generating unit (%) (%) period (years) All wind farms (onshore and offshore) 10.0%-12.0% 7.5%-10.0% 25 UK Supply 12.2% 10.1% 5 UK Generation 10.5% 11.5-17.1% 15 Gas Storage 11.0% 12.9% 20

Management have determined the pre-tax cash flows of each CGU based on past performance and its expectations of market development. Further detail on how these have been derived is included in the specific commentaries. The discount rates used are pre-tax nominal and reflect specific risks attributable to the relevant operating segments. The discount rates used have been benchmarked against externally published rates used by comparable quoted companies operating in the respective market sectors. The inflation rates used are based on publicly available forecasts for the areas of operation of the CGU and internal estimates. These have been set at 2.5% for all territories. The recoverable amount derived from the value-in-use or fair-value less costs to sell calculation is compared to the carrying amount of each CGU to determine whether the respective CGUs require to be impaired.

Specific comments on the key value-in-use and fair-value less cost to sell calculations for the main CGUs and the results of the tests conducted follow:

All wind farm CGUs For goodwill impairment testing purposes, all wind farm CGUs were established following the acquisition of the Airtricity group on 15 February 2008. In order to assess the respective recoverable amounts against an appropriate carrying value, goodwill has been allocated to the main geographic regions in which the business operates. The established wind farm CGUs (Ireland, UK, rest of Europe) are then assessed by considering the specific market attributes of those regions. Currency cash flows are set at the exchange rate at the time the impairment test is conducted. Aside from these specific market factors, the basis of review of the respective CGUs are identical.

Wind farm projects have an estimated useful life of up to 25 years and it is considered appropriate by management to assess the carrying amount against cash flow projections covering this period. The Ireland and UK wind CGUs include wind farms in operation and all CGUs include projects in the construction phase or in the development portfolio phase. These development projects are those which have not received consent or have not concluded all environmental or planning studies and as a consequence the associated cash flows have been probability adjusted.

Cash inflows for all projects are based on expected generation output from projects based on wind studies and past experience and are valued at forward power prices based on market information, where available, or internal model assumptions.

Cash outflows are based on planned capital expenditure and expected maintenance costs. The power prices and costs of operation are the most significant distinguishing factors in the respective CGU regions. Growth is based on the expected output of the respective wind farms at their available operational capacity over their life cycle.

Outcome of tests The recoverable amounts of all wind farms CGUs exceeded the respective carrying values at the time of the impairment test. While cash flow projections are subject to inherent uncertainty, reasonably possible changes in the key assumptions applied in assessing the fair-value less cost to sell would not cause a change to the conclusion reached. Scottish and Southern Energy 103 Annual Report 2009

UK Supply Goodwill carried in relation to the acquisition, in 2001, of SWALEC is attributed to the Group’s UK retail electricity and gas supply business CGU. The group manages its UK Generation and Supply activities as one integrated business but for the purposes of the value-in-use calculation only, the projected cash flows of the Supply business are considered independently. This is reliant on judgement being applied in relation to the margin being earned by the supply business. The margin assumed is based on current contractual terms and historic gross margin percentages earned. Revenues are based on the expected market share derived from the market share at the time of the approval of the business model adjusted for forecasted growth. Growth in customer numbers is anticipated at around 4.5% per annum over the forecast period and cash outflows associated with increased customer service are incorporated accordingly. This growth rate is supported by reference to both past performance and management expectation. Margins also take account of forward wholesale energy price curves for both electricity and gas. The CGU excludes the Airtricity supply business in Ireland, which did not have goodwill attributed to it in any event.

Outcome of test The recoverable amount of the UK Supply CGU exceeded the respective carrying value at the time of the impairment test. While cash flow projections are subject to inherent uncertainty, reasonably possible changes in the key assumptions applied in assessing the value-in-use would not cause a change to the conclusion reached.

UK Generation Goodwill recognised on the Group’s acquisition of Fiddler’s Ferry and Ferrybridge (FFF) and Medway is attributed to the UK Generation portfolio CGU. These plants are operated as part of the integrated Generation and Supply business segment. For the purpose of the value-in-use calculation only, the projected cash flows of the main UK Generation plants have been considered as an independent CGU. The plants included in this CGU include all gas, coal and hydro generation plants but excludes cash flows from contract energy plants, combined heat and power plants and embedded generation plants, as these plants operate independently of the main generation production portfolio.

Assumptions on market prices are made by reference to forward market prices and published market estimations, where available, and to internal model inputs beyond the observable period. Prices forecast include wholesale power prices and input costs such as wholesale gas prices, coal and oil prices as well as carbon emissions costs. Forecasts of availability and efficiency are based on management expectation and past performance. For the projected period, historic average temperatures and rainfall have been assumed. The period of the cash flow projections applied is between 5 and 10 years but it should be noted that the assets which are the basis of the review have remaining useful economic lives of between 15 and, in the case of hydro civil assets, 100 years. The discount rates applied have been standardised at a pre-tax nominal rate of 10.5%. In the previous year, a range of rates were applied although the higher rate disclosed of 17.1% was for clean-coal technologies, which are not currently part of the Group’s operating portfolio or its basis of cash projection. Consequently, the comparative needs to be considered in this light. Growth has been assumed to follow the expected operational availability of the plants within the CGU over the period noted.

Outcome of test The recoverable amount of the main UK Generation CGU exceeded its carrying value at the time of the impairment test. While cash flow projections are subject to inherent uncertainty, reasonably possible changes in the key assumptions applied in assessing the value-in-use would not cause a change to the conclusion reached.

Gas Storage Goodwill was recognised on the acquisition of the Hornsea gas storage facility in 2002/03. Initial cash flow projections are based on gross margins expected to be achieved in the period of the five year business model. Beyond this period, cash flows have been extrapolated at a growth rate lower than the long-term growth rate of the economy for a further period of 15 years, which takes the CGU toward the end of its expected economic life. This longer period more accurately reflects the long-term infrastructure nature of these assets and the returns that can be expected to be earned. Assumptions on margin for the business plan period are based on expected demand for gas storage and take into account published and projected gas wholesale prices, planned capital expenditure FINANCIAL STATEMENTS required to maintain the value of the facility and estimated operating costs.

Outcome of test The recoverable amount of the gas storage CGU exceeded its carrying value at the time of the impairment test. While cash flow projections are subject to inherent uncertainty, reasonably possible changes in the key assumptions applied in assessing the value-in-use would not cause a change to the conclusion reached. Scottish and Southern Energy 104 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

12. PROPERTY, PLANT AND EQUIPMENT Power generation Vehicles and and gas storage Land and Network miscellaneous assets buildings assets equipment Total £m £m £m £m £m Consolidated Cost: At 1 April 2007 3,032.5 119.4 4,574.1 233.1 7,959.1 Additions 392.8 33.6 324.4 31.4 782.2 Acquisitions (iii) 751.8 – – 4.8 756.6 Transfer from intangible assets (note 11) (iv) 20.4 – – – 20.4 Disposals (ii) (11.1) (7.1) (23.5) (8.4) (50.1) Exchange rate adjustments 30.7 – – – 30.7 At 31 March 2008 4,217.1 145.9 4,875.0 260.9 9,498.9 Prior year acquisitions (note 15) (4.2) – – – (4.2) Additions (vii) 813.9 65.4 368.1 43.4 1,290.8 Transfer from intangible assets (note 11) (iv) 213.0 – – – 213.0 Disposals (ii) – – (3.4) (9.4) (12.8) Disposal of 50% of Greater Gabbard (v) (397.4) – – – (397.4) Exchange rate adjustments 124.8 – – – 124.8 At 31 March 2009 4,967.2 211.3 5,239.7 294.9 10,713.1

Depreciation: At 1 April 2007 889.5 24.2 1,826.4 176.9 2,917.0 Charge for the year 121.3 2.8 126.8 16.9 267.8 Disposals (ii) (2.7) – (9.2) (8.3) (20.2) At 31 March 2008 1,008.1 27.0 1,944.0 185.5 3,164.6 Charge for the year (vi) 156.8 4.6 137.4 17.1 315.9 Disposals (ii) – – (3.3) (7.4) (10.7) Exchange rate adjustments 11.2 – – (0.1) 11.1 At 31 March 2009 1,176.1 31.6 2,078.1 195.1 3,480.9

Net book value At 31 March 2009 3,791.1 179.7 3,161.6 99.8 7,232.2 At 31 March 2008 3,209.0 118.9 2,931.0 75.4 6,334.3 At 1 April 2007 2,143.0 95.2 2,747.7 56.2 5,042.1

(i) The net book value of generation and gas storage assets includes decommissioning costs with a net book value of £21.8m, (2008 – £25.0m). In the year to 31 March 2009 the net book value of decommissioning costs related to office and computer equipment was reduced by £0.7m to £1.9m (2008 – £2.6m). This arises from the Group’s obligations under the EU Waste Electrical and Electronic Equipment (WEEE) directive. (ii) Assets disposed includes those assets which have been replaced after damage or obsolescence in the year. (iii) In the year to 31 March 2008, assets acquired in business combinations included the operational and under construction wind farm assets of Airtricity and the Combined Heat and Power biomass generation asset at Slough Heat and Power. (iv) Represents the carrying value of wind farm development assets transferred from intangible assets (note 11) which have reached the consent stage and have been approved for construction. (v) On disposal of 50% of the shareholding of Greater Gabbard Offshore Winds Limited, the value of property, plant and equipment expended to the date of disposal was part refunded by the acquiring joint venture partner, RWE Innogy, and partly equity accounted on the investment in the joint venture (see note 15). (vi) There were no impairment charges in the year against Generation assets (2008 – £12.2m). (vii) Additions in the year to 31 March 2009 include £310.9m in respect of the capital expenditure incurred in Greater Gabbard Offshore Winds during the Group’s period of full ownership (100%) from 14 May 2008 to 3 November 2008.

Land is predominantly heritable or freehold. The net book value of other land and buildings includes freehold £120.1m (2008 – £67.9m) and short leasehold £nil (2008 – £nil). Generation assets comprise generating stations and related plant and machinery and include all hydro civil assets. Cumulative interest capitalised for the Group, included in the cost of tangible fixed assets amounts to £119.2m (2008 – £68.0m).

At the balance sheet date the cumulative amounts capitalised in respect of assets in the course of construction were as follows:

2009 2008 £m £m Generation and gas storage assets 464.9 842.9 Network assets 124.5 88.0 Corporate land and buildings 58.3 34.2 647.7 965.1 Scottish and Southern Energy 105 Annual Report 2009

Included within the assets in the course of construction is the Group’s share of expenditure on the Aldbrough gas storage facility.

Included within property, plant and equipment are the following assets held under finance leases:

Vehicles and Network miscellaneous assets equipment Total £m £m £m Cost At 1 April 2007 and 31 March 2008 5.1 7.0 12.1 Disposal (0.1) – (0.1) At 31 March 2009 5.0 7.0 12.0

Depreciation At 1 April 2007 4.5 6.0 10.5 Charge for the year 0.2 0.2 0.4 At 31 March 2008 4.7 6.2 10.9 Charge for the year 0.3 0.8 1.1 At 31 March 2009 5.0 7.0 12.0

Net book value At 31 March 2009 – – – At 31 March 2008 0.4 0.8 1.2 At 1 April 2007 0.6 1.0 1.6

The Company does not hold any property, plant or equipment.

13. INVESTMENTS

(a) Associates and Joint Ventures Other jointly Scotia Gas Networks controlled entities Associates Shareholder Shareholder Shareholder Investment loans Investment loans Investment loans Total £m £m £m £m £m £m £m Consolidated Share of net assets/cost At 1 April 2007 156.9 281.9 63.2 98.1 102.2 – 702.3 Acquisitions (note 15) – – 119.7 – – – 119.7 New equity investments – – 5.8 – 8.1 – 13.9 Increase in shareholder loans – – – 5.6 – – 5.6 Repayment of shareholder loans – – – (10.8) – – (10.8) Dividends received – – (19.5) – (15.6) – (35.1) Share of (loss)/profit after tax 52.6 – 33.8 – 22.1 – 108.5

Share of other reserves adjustments 9.6 – – – – – 9.6 FINANCIAL STATEMENTS Exchange rate adjustments – – 4.1 – – – 4.1 At 31 March 2008 219.1 281.9 207.1 92.9 116.8 – 917.8 Transfer out (i) – – (38.0) – – – (38.0) Transfer in (ii) 36.8 – – – 36.8 New equity investments – – 25.5 – 13.6 3.0 42.1 Increase in shareholder loans – – – 22.2 – – 22.2 Repayment of shareholder loans – (60.0) – (19.7) – – (79.7) Dividends received – – (14.5) – (25.3) – (39.8) Share of profit after tax 38.1 – 9.9 – 33.6 – 81.6 Share of other reserves adjustments (54.6) – 19.5 – – – (35.1) Exchange rate adjustments – – 10.8 – – – 10.8 At 31 March 2009 202.6 221.9 257.1 95.4 138.7 3.0 918.7

(i) At 14 May 2008, the Group acquired 50% of Greater Gabbard Offshore Winds Limited, for a net consideration of £33.4m, including cash of £40.0m (note 15). At this point, the Group assumed 100% ownership and consequently the carrying value held as investment in jointly controlled entities was transferred with the equity being fully consolidated in the accounts. Scottish and Southern Energy 106 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

13. INVESTMENTS (continued)

(ii) At 3 November 2008, the Group disposed of 50% of Greater Gabbard Offshore Winds Limited and consequently recognised the remaining fair-value equity investment as investment in jointly controlled entities at that point. The Group also has an interest-bearing loan of £183.5m in the venture.

Scotia Gas Networks Shareholder Investment loans Total £m £m £m Company Share of net assets/cost At 1 April 2007 and 1 April 2008 235.0 281.9 516.9 Repayment of shareholder loans – (60.0) (60.0) At 31 March 2009 235.0 221.9 456.9

The investment in Scotia Gas Networks is disclosed separately to aid understanding of the Group’s financial performance. Prior to the investment in Scotia Gas Networks, the Company did not have any investments in joint ventures or associates.

Details of the principal jointly controlled entities, operations and associates are as follows:

Country of 31 March 2009 31 March 2008 incorporation Holding % Holding % Principal activity Jointly controlled entities PriDE (South East Regional Prime) Limited (ii) England and Wales 50 50 Defence estates contractor Seabank Power Limited (iii) England and Wales 50 50 Electricity generation Scotia Gas Networks Limited (v) England and Wales 50 50 Investment in gas networks Marchwood Power Limited (i) England and Wales 50 50 Electricity generation Braes of Doune Wind Farm (Scotland) Limited (vi) Scotland 50 50 Wind generation Midas Energy Limited (vi) Republic of Ireland 50 50 Wind generation Greater Gabbard Offshore Winds Ltd (vi) England and Wales 50 50 Wind development St John Hill Limited (vi) Scotland 50 50 Wind development IE CHP (UK & Eire) Limited (iv) Scotland 50 50 Fuel cell power systems Aquamarine Power Limited (i) Scotland 50 50 Marine energy conversion Gothia Airtricity Vind AB (vi) Sweden 50 – Wind development Green Way Limited (vi) Republic of Ireland 50 – Wind development

Associates Barking Power Limited (i) England and Wales 30 30 Electricity generation Derwent Co-generation Limited (i) England and Wales 49.5 49.5 Electricity generation Vital Holdings Limited (iv) England and Wales 30 30 Efficient energy provision Insource Energy Limited (iv) England and Wales 33.3 33.3 Energy and waste management Onzo Limited (iv) England and Wales 24.5 24.5 Energy displays Geothermal International Limited (iv) England and Wales 20 – Ground source heat pump systems

Location of 31 March 2009 31 March 2008 operations Holding % Holding % Principal activity Jointly controlled operations (unincorporated) Aldbrough England 66.7 66.7 Development of gas storage facility Beatrice Scotland 50 50 Development of offshore wind farm facility

The above companies’ shares consist of ordinary shares only. All companies operate in Great Britain and Ireland. Seabank Power Limited and Marchwood Power Limited have accounting periods ending on 31 December. All other companies have accounting periods ending on 31 March.

(i) Shares held by SSE Generation Limited (ii) Shares held by Southern Electric Contracting Limited (iii) Shares held by SSE Seabank Investments Limited (iv) Shares held by SSE Venture Capital Limited (v) Shares held by Scottish and Southern Energy plc (vi) Shares held by Airtricity Holdings Limited (or subsidiaries) Scottish and Southern Energy 107 Annual Report 2009

At 31 March 2009, the Group had invested £35.8m (2008 – £16.1m) in Marchwood Power Limited. In addition to this, the Group had provided an interest-bearing loan of £123.0m (2008 – £44.5m) to Marchwood Power, which is reported in Other receivables (note 17).

The material significance of the Scotia Gas Networks Limited investment warrants separate disclosure from other jointly controlled entities. Accordingly, the result from the Group’s share of these businesses is included as a separate segment in the analysis of Group operating profit (note 3). The results of Scotia Gas Networks Limited, of which the Group has a 50% share, can be illustrated thus:

2009 2008 Before exceptional Exceptional Before exceptional Exceptional items and certain items and certain items and certain items and certain re-measurements re-measurements Total re-measurements re-measurements Total £m £m £m £m £m £m Operating profit 361.0 – 361.0 323.0 – 323.0 Finance costs: excluding loan stock (173.0) 10.8 (162.2) (165.4) 8.4 (157.0) Finance costs: interest on loan stock (67.1) – (67.1) (70.8) – (70.8) Profit before tax 120.9 10.8 131.7 86.8 8.4 95.2 Taxation (52.4) (3.0) (55.4) (42.4) 52.4 10.0 Profit for the year 68.5 7.8 76.3 44.4 60.8 105.2

SSE share of profit 34.2 3.9 38.1 22.2 30.4 52.6

As an investor, Scottish and Southern Energy plc received £33.6m (2008 – £35.4m) in relation to loan stock interest payable to the Group.

The balance sheet of Scotia Gas Networks Limited can be summarised as follows (100%):

Non-current Current Current Non-current assets assets liabilities liabilities £m £m £m £m Scotia Gas Networks Limited 31 March 2009 5,042.0 184.2 (262.8) (4,648.0) 31 March 2008 4,764.2 161.8 (609.2) (3,878.6)

The financial statements of the Group’s other jointly controlled entities and associates can be summarised as follows (100%):

Current Non-current Current Non-current assets assets liabilities liabilities Revenues Profit after tax £m £m £m £m £m £m Jointly controlled entities 31 March 2009 122.3 554.6 (91.6) (411.6) 320.3 21.7 31 March 2008 147.6 443.3 (214.6) (231.7) 313.4 57.0

Associates 31 March 2009 163.9 453.3 (108.0) (140.8) 570.7 99.6

31 March 2008 137.6 468.2 (74.7) (192.4) 292.4 62.0 FINANCIAL STATEMENTS

(b) Other investments Solarcentury Sigma RockTron Other Total £m £m £m £m £m At 1 April 2007 3.0 0.5 – 0.6 4.1 Additions in the year 1.1 0.8 – – 1.9 At 31 March 2008 4.1 1.3 – 0.6 6.0 Additions in the year – 1.1 10.0 1.4 12.5 Disposals in the year – – – (0.2) (0.2) At 31 March 2009 4.1 2.4 10.0 1.8 18.3 Scottish and Southern Energy 108 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

14. SUBSIDIARY UNDERTAKINGS

Details of the principal subsidiary undertakings are as follows:

Country of 2009 2008 incorporation Holding % Holding % Principal activity SSE Services plc (i) England and Wales 100 100 Finance and IT support services SSE Energy Supply Limited (i) England and Wales 100 100 Electricity supply Airtricity Holdings Limited (i) Ireland 100 100 Wind farm developer SSE Telecommunications Limited (i) Scotland 100 100 Telecommunication services SSE Generation Limited (i) England and Wales 100 100 Electricity generation Medway Power Limited (ii) England and Wales 100 100 Electricity generation Keadby Generation Limited (ii) England and Wales 100 100 Electricity generation Slough Heat and Power Limited (ii) England and Wales 100 100 Electricity generation Scottish Hydro Electric Transmission Limited (iii) Scotland 100 100 Transmission of electricity Scottish Hydro Electric Power Distribution plc (iii) Scotland 100 100 Distribution of electricity Southern Electric Power Distribution plc (iii) England and Wales 100 100 Distribution of electricity S+S Limited (iii) Scotland 100 100 Electricity connections Southern Electric Contracting Limited (iv) England and Wales 100 100 Electrical contractor Southern Electric Gas Limited (v) England and Wales 100 100 Gas supply SSE Hornsea Limited (v) England and Wales 100 100 Gas storage Neos Networks Limited (vi) England and Wales 100 100 Telecommunication services

The above companies’ shares consist of ordinary shares only. All companies operate in Great Britain and Ireland except for SSE Insurance Limited which operates in the Isle of Man. All companies have accounting periods ending on 31 March.

A full list of Group companies will be included in the company’s annual return and the shares are held by:

(i) Scottish and Southern Energy plc (ii) Shares held by SSE Generation Limited. (iii) Shares held by SSE Power Distribution Limited. (iv) Shares held by SSE Contracting Group Limited. (v) Shares held by SSE Energy Supply Limited. (vi) Shares held by SSE Telecommunications Limited.

Investment in subsidiaries Total £m Company At 1 April 2007 777.9 Acquired in the year (i) 1,349.1 Increase in existing investments (ii) 10.8 At 31 March 2008 2,137.8 Increase in existing investments (ii) 16.4 At 31 March 2009 2,154.2

(i) In the previous financial year, the Company acquired 100% of the issued share capital in Airtricity Holdings Limited. Details of this acquisition are included at note 15. (ii) The increase in existing investments held by the Company relates to equity shares in the Company awarded to the employees of the subsidiaries of the Group under the Group’s share schemes, which are recognised as in increase in the cost of investment in those subsidiaries as directed by IFRIC 11. This also includes an additional £2.1m paid in relation to the acquisition of Airtricity Holdings Limited in the previous financial year. Scottish and Southern Energy 109 Annual Report 2009

Service concession arrangements In 50:50 partnership with Royal Bank Leasing Limited, the Group has established three companies to provide street lighting services to councils under the Private Finance Initiative (PFI). These services are thereafter sub-contracted to Southern Electric Contracting Limited, a wholly owned subsidiary. The companies established are as follows:

Company Council Tay Valley Lighting (Stoke on Trent) Limited Stoke-on-Trent Tay Valley Lighting (Newcastle and North Tyneside) Limited Newcastle and North Tyneside Tay Valley Lighting (Leeds) Limited Leeds City Council

Under SIC-12 Consolidation – Special Purpose Entities, despite being 50% owned, the Tay Valley Lighting companies are categorised as subsidiaries and are accounted for accordingly. The debt associated with these companies is non-recourse to the Group. The arrangements for all three companies are materially similar.

In addition to these, the Group acquired the Seeboard Trading Limited group on 3 March 2008 which performs similar services under three PFI contracts. The terms of the service concession arrangement are similar to those operated by the Tay Valley Lighting companies. The council and contract holder within the acquired group are as follows:

Company Council Dorset Lighting Limited Dorset County Council Ealing Lighting Limited London Borough of Ealing Islington Lighting Limited London Borough of Islington

Characteristics of the arrangements

Description The contracts are 25 year arrangements to replace ageing street-lighting stock and to subsequently maintain the new assets throughout each Councils’ areas.

Signifi cant terms The cash flows under the PFI arrangements come from the unitary charge for these services paid by the Councils. The unitary charge can only be adjusted if performance under the contract falls below the required standards. Any significant change to the services proposed by either party is subject to a formal change procedure and agreement to such a change is required by the other party.

Nature and extent of rights and obligations The assets are part of the public highway and ownership of the assets remains with the Councils. The contract holding companies are licensed to replace and maintain the assets for the period of the contract. This obligation is passed down to Southern Electric Contracting Limited or to other companies within the Seeboard Trading group through the operating sub-contract. Any failure to provide the services to the required standards will result in financial penalties which are taken from the unitary charge.

The companies have 25 year contracts with no extension options. Termination during this period can be initiated through a number of routes including service provider default, force majeure or the event of a risk becoming uninsurable, authority default, voluntary authority termination, or termination for a prohibited act or breach of refinancing provisions. In all cases, a formula exists for calculating compensation payments to the service provider.

Throughout the contract period there are a number of circumstances under which the companies could potentially be required to provide additional services: FINANCIAL STATEMENTS

(i) Changes in the law If circumstances arise where by a change in legislation would mean a change in the way the services are to be provided the companies would be liable for part of the cost of this change. This liability is capped.

(ii) Final survey The Councils have the ability to deduct 20% of the unitary charge in the last two years if an independent survey indicates the assets are unlikely to have a 5-year residual life.

The Group’s exposure to unforeseen obligations is insured. Scottish and Southern Energy 110 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

15. ACQUISITIONS AND DISPOSALS

(a) Acquisitions

(i) Greater Gabbard Offshore Winds Limited (GGOWL) GGOWL was originally a jointly controlled entity between Airtricity, acquired by SSE in February 2008, and Fluor International Limited. The company was created specifically to develop the Greater Gabbard Offshore wind farm in the outer Thames Estuary. On 14 May 2008, Airtricity Holdings acquired the remaining 50% equity shareholding in Greater Gabbard Offshore Winds Limited from Fluor International Limited for cash consideration of £40.0m, increasing its stake from 50% to 100%. Subsequently, on 3 November 2008, Airtricity Holdings sold 50% of its equity shareholding in GGOWL to RWE npower renewables Limited, the UK fully owned subsidiary of RWE Innogy GmbH. RWE npower renewables also reimbursed SSE for 50% of the capital costs already incurred in developing the project.

The total proceeds on disposal was £308.5m, which comprised £165.6m reimbursement of 50% of the capital costs incurred in developing the project and £142.9m in relation to 50% of the equity. The gain on sale recognised was £102.7m, which has been separately disclosed as an exceptional item.

The transactions can be summarised thus:

Acquisition of 50% on 14 May 2008: Book value of Fair-value 50% acquired acquired £m £m Goodwill – 9.4 Development assets 6.6 40.0 Loans (6.6) (6.6) Deferred tax – (9.4) Net assets – 33.4

Consideration paid being: Cash 40.0 Loans assumed (6.6) 33.4

On acquisition of the second 50%, the wholly owned GGOWL entity was fully consolidated as a subsidiary in the Group. The fair-values previously attributed to jointly controlled entities established on acquisition of Airtricity Holdings were consequently transferred to development assets. The project achieved consent in the period between full consolidation and part-disposal and as a result the expenditure incurred at the point of board approval was transferred from development assets to property, plant and equipment, including the previously mentioned fair-values. Consequently, at the point of disposal, a higher project book value in relation to property, plant and equipment had been recorded than the proceeds reimbursed by RWE Innogy. This can be summarised thus:

Disposal of 50% on 3 November 2008: Book value £m Property, plant and equipment 397.4 Goodwill 17.4 Loans (331.2) Deferred tax (9.4) Net assets 74.2

50% of value of business disposed of: 37.1

Consideration paid for 50% being: Cash received by Group 308.5 Less: contribution to loans (165.6) Less: costs of disposal (3.1) Net proceeds of disposal 139.8

Gain on disposal 102.7 Scottish and Southern Energy 111 Annual Report 2009

(ii) Other acquisitions In the year, the Group acquired the following companies, all of which are involved in the construction and development of wind farms.

Provisional Country of Shareholding consideration Entity acquired incorporation Date of acquisition acquired £m Aldeia Velha Portugal 14 April 2008 100 % 0.5 Riviera Group Portugal 26 June 2008 60% 1.3 Nextwind S.R.L Italy 26 June 2008 60% 3.2 Airtricity Marao SA Portugal 21 August 2008 90% 0.5 Atlantico SA Portugal 14 October 2008 90% – Limerick West Windfarm Ltd Republic of Ireland 17 October 2008 100% 5.3 Griffin Wind Farm Ltd Scotland 13 January 2009 89.8% 42.4 Slaheny Energy Ltd Republic of Ireland 20 January 2009 100% 2.4 55.6

The provisional book values and fair-values of the assets and liabilities acquired were as follows: Carrying value of Fair-value of acquired entities acquired entities £m £m Goodwill – 12.6 Development assets – 69.9 Property, plant and equipment 6.1 0.1 Cash and cash equivalents 0.1 0.1 Other net current liabilities (6.7) (6.7) Deferred tax – (12.6) Net (liabilities)/assets (0.5) 63.4 Less: non-controlling interest (7.8) Total consideration 55.6

The non-controlling interest values were calculated by taking a proportionate share of the recognised amounts of the acquiring companies identifiable net assets at the acquisition date. The total consideration was represented by £37.6m cash and £18.0m deferred consideration.

No significant profit or loss was recognised from these acquisitions in the period to 31 March 2009.

(b) Acquisitions in the previous year

(i) Airtricity On 15 February 2008, the Company acquired 100% of the issued share capital in Airtricity Holdings Limited (‘Airtricity’) for a combined consideration of £1,351.2m. The total value of the businesses acquired was £1,005.2m. This included cash assets of €793.2m including the remaining proceeds of Airtricity’s disposal of its North American business in late 2008.

A comparison of the provisional and final fair-values of the assets and liabilities acquired, and their respective book values, is shown below: FINANCIAL STATEMENTS FINANCIAL STATEMENTS Provisional Provisional Final Final Change in carrying value fair-value carrying value fair-value fair-value of acquired of acquired of acquired of acquired of assets and business business business business liabilities £m £m £m £m £m Intangible assets 62.5 228.2 62.5 229.3 1.1 Property, plant and equipment 401.4 707.0 401.4 707.0 – Investment in jointly controlled entities 49.8 119.7 49.8 119.7 – Derivatives and other financial assets (1.9) 13.2 (1.9) 13.2 – Cash and cash equivalents 594.0 594.0 594.0 594.0 – Other net current assets/(liabilities) 15.3 17.4 9.7 12.0 (5.4) Loans and borrowings (517.3) (522.3) (517.3) (522.3) – Deferred tax (3.0) (146.4) (3.0) (147.7) (1.3) Net assets 600.8 1,010.8 595.2 1,005.2 (5.6) Goodwill 338.3 346.0 7.7 Total consideration 1,349.1 1,351.2 2.1 Scottish and Southern Energy 112 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

15. ACQUISITIONS AND DISPOSALS (continued)

The changes in the fair-values of the acquired assets and liabilities of the Airtricity group mainly relates to changes in the carrying values of certain working capital items acquired, changes to the fair-values attributed to the acquired wind farm development assets and changes to the deferred tax calculated in relation to the fair-value adjustments recognised. The final consideration increased by £2.1m on settlement of related incidental fees.

Goodwill has arisen in relation to the future development potential of the Airtricity businesses including synergies relating to the purchase and includes recognition of deferred tax on the fair-value adjustments made. Goodwill has been subject to impairment test review (note 11).

(ii) Other acquisitions The group also made the following acquisitions in the previous financial year: Provisional Shareholding consideration Entity acquired Date of acquisition acquired £m I&H Brown Toddleburn Limited 20 December 2007 100% 4.5 Slough Heat and Power Limited 1 January 2008 100% 48.7 CHP Supply Limited (Republic of Ireland) 25 January 2008 100% 2.0 Hills Electrical & Mechanical plc 8 February 2008 100% 0.2 Seeboard Trading Limited 29 February 2008 100% 9.5 64.9

All businesses operate in the United Kingdom with the exception of CHP Supply Limited, which is registered in the Republic of Ireland.

A comparison of the provisional fair-values attributed to the acquired businesses and their final fair-values is shown below:

Provisional Provisional Final Change in carrying value fair-value fair-value fair-value of acquired of acquired of acquired of assets and businesses businesses businesses liabilities £m £m £m £m Intangible assets – 11.9 20.7 8.8 Property, plant and equipment 46.9 49.6 45.4 (4.2) Other financial assets – 16.9 16.9 – Inventories 9.8 9.7 5.7 (4.0) Cash and cash equivalents 3.3 3.3 3.3 – Other net current assets/(liabilities) 22.7 15.6 2.7 (12.9) Loans and borrowings (25.7) (25.7) (25.7) – Deferred tax (8.5) (16.1) (8.6) 7.5 Other provisions (0.9) (6.8) (6.8) – Net assets 47.6 58.4 53.6 (4.8) Goodwill 6.5 – (6.5) Total consideration 64.9 53.6 (11.3)

The decrease in consideration paid in relation to these acquisitions relates to settlement of contingent consideration on the Slough Heat and Power and Seeboard Trading acquisitions and the recognition of pension liabilities related to the employees of the acquired Slough Heat and Power group of companies.

On final assessment of the fair-values of the acquired businesses, an increase in the fair-value of intangible assets acquired (primarily customer lists and contracts) was recognised and a reduction in the deferred tax liabilities acquired was also recorded, relating to the changes in fair-value adjustments and the recognition of the pension liabilities at Slough Heat and Power. As a consequence, no goodwill was recognised in relation to the transactions. Scottish and Southern Energy 113 Annual Report 2009

16. INVENTORIES Consolidated 2009 2008 £m £m Fuel and consumables 345.8 224.5 Work in progress 27.4 32.6 Goods for resale 2.5 2.3 Less: provisions held (9.0) (8.2) 366.7 251.2

The Group has recognised £504.9m as a cost of sale in the year (2008 – £798.9m) and have also recognised £8.2m (2008 – £3.4m) relating to stock write-downs and increases in provisions held. The Company does not hold any inventories.

17. TRADE AND OTHER RECEIVABLES Consolidated Company 2009 2008 2009 2008 £m £m £m £m Current assets Retail receivables 994.6 554.0 – – Wholesale and trading trade receivables 1,978.0 1,165.6 – – Other trade receivables 360.7 322.6 – – Total trade receivables 3,333.3 2,042.2 – – Amounts owed by subsidiary undertakings – – 3,052.7 2,328.5 Other receivables 589.0 389.4 413.0 100.7 Cash held as collateral 86.9 5.6 – – Prepayments and accrued income 1,650.4 963.1 – – 5,659.6 3,400.3 3,465.7 2,429.2 Non-current assets Amounts owed by subsidiary undertakings – – 2,066.9 1,772.7 5,659.6 3,400.3 5,532.6 4,201.9

Wholesale and trading trade receivables includes a balance of £190.9m (2008 – nil) in relation to contractual balances due from British Energy.

Other receivables includes £123.0m (2008 – £44.5m) receivable from Marchwood Power Limited (note 13) and financial assets totalling £481.7m (2008 – £170.4m). Cash held as collateral relates to amounts deposited on commodity trading exchanges.

Trade receivables and other financial assets are part of the Group’s financial exposure to credit risk as explained in note 29.

18. CASH AND CASH EQUIVALENTS Consolidated Company 2009 2008 2009 2008 £m £m £m £m Bank balances 145.7 125.8 12.1 0.7 Call deposits 150.2 129.5 123.0 103.5 FINANCIAL STATEMENTS FINANCIAL STATEMENTS Cash and cash equivalents 295.9 255.3 135.1 104.2

Cash and cash equivalents (which are presented as a single class of assets in the face of the balance sheet) comprise cash at bank and short term highly liquid investments with a maturity of three months or less. Consolidated Company 2009 2008 2009 2008 £m £m £m £m Cash and cash equivalents (from above) 295.9 255.3 135.1 104.2 Bank overdraft (note 22) (2.3) (12.2) – – Cash and cash equivalents in the statement of cash flows 293.6 243.1 135.1 104.2 Scottish and Southern Energy 114 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

19. TRADE AND OTHER PAYABLES Consolidated Company 2009 2008 2009 2008 restated £m £m £m £m Current liabilities Amounts due to subsidiary undertakings – – 2,517.2 3,526.7 Trade payables 2,603.6 1,849.0 – – Other creditors 1,023.0 708.4 118.3 53.5 Accruals and deferred income (i) 738.3 842.5 – – 4,364.9 3,399.9 2,635.5 3,580.2 Non-current liabilities Accruals and deferred income (ii) 426.0 490.1 – – 4,790.9 3,890.0 2,635.5 3,580.2

(i) Current accruals and deferred income includes customer contributions of £15.4m (2008 – £14.9m) and government grants of £0.1m (2008 – £0.1m). (ii) Non-current accruals and deferred income includes customer contributions of £258.0m (2008 – £246.9m) and government grants of £2.0m (2008 – £2.1m). Carbon emissions liabilities within other creditors have been restated in the previous financial year (note 2).

20. CURRENT TAX LIABILITIES Consolidated Company 2009 2008 2009 2008 £m £m £m £m Corporation tax 254.6 220.8 – 9.0

21. CONSTRUCTION CONTRACTS 2009 2008 £m £m Contracts in progress at balance sheet date: Amounts due from contract customers included in trade and other receivables (note 17) 41.4 32.0 Amounts due to contract customers included in trade and other payables (note 19) (24.4) (26.8)

Contract costs incurred plus recognised profits less recognised losses to date 221.9 189.1 Less: Progress billings (231.6) (202.9) (9.7) (13.8)

In the year to 31 March 2009, contract revenue of £481.9m (2008 – £403.8m) was recognised.

At 31 March 2009, retentions held by customers for contract work amounted to £1.6m (2008 – £0.9m). Advances received from customers for contract work amounted to £6.4m (2008 – £4.1m).

At 31 March 2009, amounts of £nil (2008 – £nil) included in trade and other receivables and arising from construction contracts are due for settlement after more than 12 months.

The Company does not hold any construction contracts.

22. LOANS AND OTHER BORROWINGS Consolidated Company 2009 2008 2009 2008 £m £m £m £m Current Bank overdraft 2.3 12.2 – – Other short-term loans 1,057.7 1,835.3 916.4 1,696.3 1,060.0 1,847.5 916.4 1,696.3 Obligations under finance leases 0.1 0.1 – – 1,060.1 1,847.6 916.4 1,696.3

Non-current Loans 4,335.7 2,073.1 2,628.3 372.4 Obligations under finance leases 0.4 0.5 – – Amounts owed to subsidiary undertakings – – 240.2 240.2 4,336.1 2,073.6 2,868.5 612.6 Scottish and Southern Energy 115 Annual Report 2009

(i) Borrowings

Borrowing facilities The Group has an established €1.5bn Euro Commercial Paper programme. Paper can be issued in a range of currencies and is swapped back into sterling.

The Group entered into a new £850m committed borrowing facility on 3 April 2009. This facility, which matures in June 2012, replaces a £650m facility which had been due to expire in November 2009. The new facility will again act as a liquidity backstop to the Group’s commercial paper issuance.

The Group also has a €150m committed bridge facility, of which €20m was drawn down as at 31 March 2009. This facility was originally €2.5bn in size and has been nearly fully refinanced during the course of the year. The remaining commitment is due to expire in June 2009, but this maturity date is extendable for a further 12 months, to June 2010, at SSE’s option.

Analysis of borrowings

Loans and borrowings 2009 2009 Weighted average 2009 2009 Carrying interest rate (vii) Face value Fair-value amount % £m £m £m Current Bank overdrafts (i) 0.50 2.3 2.3 2.3 Other short-term loans – amortising (ii) 8.79 88.4 90.3 88.4 Other short-term loans – non-amortising (iii) 2.67 904.1 900.9 900.8 3.75% Convertible bond repayable on 29 October 2009 (vi) 3.75 15.9 19.6 15.6 Non-recourse funding (iv) 5.51 52.9 55.8 52.9 Total current 1,063.6 1,068.9 1,060.0

Non-current Bank loans – amortising (ii) 6.36 21.4 22.7 21.4 Bank loans – non-amortising (v) 4.93 603.7 641.3 605.2 6.125% Eurobond repayable on 29 July 2013 6.13 555.1 579.9 552.9 5.75% Eurobond repayable 5 February 2014 5.75 700.0 729.0 695.5 Non-recourse funding (iv) 6.10 144.8 150.1 144.8 Between two and five years 2,025.0 2,123.0 2,019.8

Bank loans – non-amortising (v) 3.09 25.0 24.9 25.0 Non-recourse funding (iv) 5.89 309.0 326.0 309.0 5.875% Eurobond repayable on 26 September 2022 5.88 300.0 311.0 296.3 8.375% Eurobond repayable on 20 November 2028 8.38 500.0 606.1 491.8 5.50% Eurobond repayable on 19 June 2032 5.50 350.0 319.2 350.2 4.625% Eurobond repayable on 20 February 2037 4.63 325.0 247.5 323.4 6.25% Eurobond repayable on 27 August 2038 6.25 350.0 336.9 345.3 4.454% Index linked loan repayable on 27 February 2044 2.16 100.0 105.4 99.3 1.429% Index linked bond repayable on 20 October 2056 1.52 109.0 106.0 109.0 FINANCIAL STATEMENTS FINANCIAL STATEMENTS Over five years 2,368.0 2,383.0 2,349.3

Fair-value adjustment (note 29) – – (33.4) Total non-current 4,393.0 4,506.0 4,335.7

Total 5,456.6 5,574.9 5,395.7 Scottish and Southern Energy 116 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

22. LOANS AND OTHER BORROWINGS (continued)

Loans and borrowings 2008 2008 Weighted average 2008 2008 Carrying interest rate (vii) Face value Fair-value amount % £m £m £m Current Bank overdrafts (i) 6.25 12.2 12.2 12.2 Other short-term loans – amortising (ii) 7.72 23.4 24.4 23.4 Other short-term loans – non-amortising (iii) 5.46 1,804.1 1,803.6 1,803.4 Non-recourse funding (iv) 6.23 8.5 8.5 8.5 Total current 1,848.2 1,848.7 1,847.5

Non-current Bank loans – amortising (ii) 7.33 195.1 197.1 195.1 Bank loans – non-amortising (v) 7.32 336.4 343.6 336.4 3.75% Convertible bond repayable on 29 October 2009 (vi) 3.75 79.3 123.3 76.3 Non-recourse funding (iv) 6.19 39.4 39.4 39.4 Between two and five years 650.2 703.4 647.2

Bank loans – amortising (ii) 6.40 192.1 195.3 192.1 Bank loans – non-amortising (v) 5.56 109.2 110.2 109.2 Non-recourse funding (iv) 6.29 50.9 50.9 50.9 5.875% Eurobond repayable on 26 September 2022 5.88 300.0 290.8 296.1 5.50% Eurobond repayable on 19 June 2032 5.50 350.0 324.8 350.3 4.625% Eurobond repayable on 20 February 2037 4.63 325.0 260.6 323.3 1.429% Index linked bond repayable on 20 October 2056 5.29 104.0 105.9 104.0 Over five years 1,431.2 1,338.5 1,425.9

Total non-current 2,081.4 2,041.9 2,073.1

Total 3,929.6 3,890.6 3,920.6

(i) Bank overdrafts are repayable on demand. (ii) Balances under amortising loans are adjusted for capital repayments or drawings in the financial year. These are held with the European Investment Bank (EIB) in a combination of fixed and floating rates. (iii) Balances include commercial paper and cash advances. (iv) The Tay Valley Lighting companies formed under 50:50 partnership with Royal Bank Leasing Limited to provide street-lighting services are categorised as subsidiaries under SIC-12 (note 14). The debt held by these companies is included on consolidation but is non-recourse to the Group. (v) The floating rate European Investment Bank advances are reset quarterly at a rate normally less than three month LIBOR. Other loans include a mixture of fixed and floating debt repayable between 2009 and 2014. (vi) The liability component of the convertible bond is presented separately under IAS 32. (vii) The weighted average interest rates are as noted. The weighted average interest rates for the Group (including swaps) for the year ended 31 March 2009 was 5.25% (2008 – 5.23%). Scottish and Southern Energy 117 Annual Report 2009

Convertible bond The convertible bond was issued on 29 October 2004 in exchange for £300.0m in cash. The bond entitles holders to convert the bond into ordinary shares at any time up to 24 October 2009 at the applicable conversion share price. With effect from 26 September 2008, the effective conversion price of the bond changed from £9.00 per ordinary share at the date of issue to £8.88 per ordinary share. The conversion price is subject to adjustment in certain circumstances set out in the offering circular including payment of dividends greater than amounts set out in the circular, capital restructuring and change of control. Conversion is at the option of the bond holder.

At 31 March, bond holders had converted debt with a nominal value of £257.6m at the £9.00 per share conversion price and £26.5m at the £8.88 per share conversion price. Conversion took place in the following periods: Nominal value of bond converted Number £m of shares Year to 31 March 2007 0.1 11,111 Year to 31 March 2008 220.6 24,512,537 Year to 31 March 2009 63.4 7,081,333 Total to 31 March 2009 284.1 31,604,981

The net proceeds received from the issue of the bond have been split between a liability element and an equity component, the liability element representing the initial fair-value of the debt excluding the embedded option to convert the liability into equity of the Group.

At 31 March 2009 At 1 April 2008 £m £m Nominal value of issue of convertible bond 15.9 79.3 Costs of issue (0.1) (0.3) Net proceeds of convertible bond issued 15.8 79.0 Less: equity component and accreted debt element (0.2) (2.7) Liability component 15.6 76.3

On partial conversion, a debt element of £60.7m (2008 – £208.6m) was converted from debt to equity. The costs of issue of the bond are amortised over the term of the bond. An additional interest charge of £0.6m (2008 – £4.6m) was recorded.

For the purpose of diluted Earnings per Share (EPS), convertible bond interest of £1.7m (2008 – £14.0m) is added back to earnings and the number of potential ordinary shares to be issued includes the following in respect of this bond: 2009 2008 Number Number of shares of shares Weighted average number of shares 1,728,352 8,809,685

(ii) Finance lease liabilities Future finance lease commitments are as follows: Minimum Present value of lease payments minimum lease payments 2009 2008 2009 2008 £m £m £m £m Amounts payable:

Within one year 0.1 0.1 0.1 0.1 FINANCIAL STATEMENTS Between one and five years 0.3 0.4 0.3 0.3 After five years 0.4 0.5 0.1 0.2 0.8 1.0 0.5 0.6 Less: future finance charge (0.3) (0.4) Present value of lease obligations 0.5 0.6

The average lease term is 7.5 years. For the year ended 31 March 2009, the average effective borrowing rate was 8% (2008 – 8%). Interest rates are fixed at the contract date. All leases, held by the Group’s telecoms businesses, are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. The fair-value of the Group’s lease obligations approximates their carrying amount. The Group’s obligations under finance leases are secured by the lessors’ rights over the leased assets. The Company does not have any obligations under finance leases. Scottish and Southern Energy 118 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

23. DEFERRED TAXATION

The following are the deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods: Accelerated Fair-value Retirement Share capital gains/(losses) Convertible benefit based allowances on derivatives bond obligations payments Other (i) Total £m £m £m £m £m £m £m Consolidated At 1 April 2007 898.0 19.4 4.0 (27.6) (4.7) (31.4) 857.7 Effect of tax rate change – income statement (60.2) 1.7 (0.2) – – 3.3 (55.4) Effect of tax rate change – equity – 1.1 – 1.0 0.3 – 2.4 Acquisitions 18.5 (1.0) – – – 145.0 162.5 Charge/(credit) to Income Statement 4.0 (50.7) (1.4) 20.5 (0.3) (16.1) (44.0) Charge/(credit) to equity – 7.1 (1.8) (7.7) 0.6 (9.0) (10.8) Exchange adjustments 0.8 (0.1) – – – 11.1 11.8 At 1 April 2008 861.1 (22.5) 0.6 (13.8) (4.1) 102.9 924.2 Prior year acquisitions (note 15) – – – – – (6.2) (6.2) Acquisitions (note 15) – – – – – 12.6 12.6 Charge/(credit) to Income Statement (note 8) 24.7 (352.3) (0.2) 15.3 (0.6) (34.4) (347.5) Charge/(credit) to equity (note 8) – 5.2 – (78.1) 3.2 (39.7) (109.4) Exchange adjustments 1.7 – – – – 19.2 20.9 At 31 March 2009 887.5 (369.6) 0.4 (76.6) (1.5) 54.4 494.6

Accelerated Fair-value Retirement Share capital gains/(losses) Convertible benefit based allowances on derivatives bond obligations payments Other Total £m £m £m £m £m £m £m Company At 1 April 2007 – (13.6) 4.0 38.4 – (0.9) 27.9 Effect of tax rate change – income statement – 0.6 (0.2) – – 0.1 0.5 Effect of tax rate change – equity – – – (2.6) – – (2.6) Charge/(credit) to Income Statement – 12.9 (1.4) 6.2 – (6.3) 11.4 Charge/(credit) to equity – 0.3 (1.8) (18.0) 0.9 (9.0) (27.6) At 1 April 2008 – 0.2 0.6 24.0 0.9 (16.1) 9.6 Charge/(credit) to Income Statement – 10.5 (0.2) 6.3 – (40.4) (23.8) Charge/(credit) to equity – 11.8 – (30.3) – – (18.5) At 31 March 2009 – 22.5 0.4 – 0.9 (56.5) (32.7)

(i) Includes deferred tax on fair valuation adjustments in business combinations. Deferred tax recognised on full acquisition of Greater Gabbard Offshore Winds was derecognised on disposal of 50% of the shareholding.

Certain deferred tax assets and liabilities have been offset, including the asset balances analysed the tables above. The following is an analysis of the deferred tax balances (after offset) for financial reporting purposes:

Consolidated Company 2009 2008 2009 2008 £m £m £m £m Deferred tax liabilities 594.7 967.3 – 9.6 Deferred tax assets (100.1) (43.1) (32.7) – Net deferred tax liabilities/(assets) 494.6 924.2 (32.7) 9.6

The deferred tax assets disclosed relate to the Group’s pension scheme liabilities.

At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was £1.7m (2008 – £2.1m). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future.

Temporary differences arising in connection with interests in associates and jointly controlled entities are recorded as part of the Group’s share of investment in those entities. The aggregate amount of these is a charge of £1.0m (2008 – £10.1m credit). Scottish and Southern Energy 119 Annual Report 2009

24. PROVISIONS Onerous energy contracts Decommissioning Other (i) (ii) (iii) Total £m £m £m £m Consolidated At 1 April 2008 54.4 31.5 30.9 116.8 Charged in the year – – 12.0 12.0 Unwind of discount – 4.7 0.4 5.1 Released during the year (42.6) – (4.9) (47.5) Utilised during the year (8.3) – (4.3) (12.6) Translation Difference 0.2 – – 0.2 At 31 March 2009 3.7 36.2 34.1 74.0

At 31 March 2009 Non-current 3.7 36.0 20.5 60.2 Current – 0.2 13.6 13.8 3.7 36.2 34.1 74.0 At 31 March 2008 Non-current 53.1 31.3 22.9 107.3 Current 1.3 0.2 8.0 9.5 54.4 31.5 30.9 116.8

(i) The onerous energy contracts provision related primarily to future losses on purchase contracts designated as held for own use and were therefore outside the scope of IAS 39, and future losses on other specific contracts. The purchase contracts have been assessed as no longer being onerous in the current year following the increase in commodity prices. The remaining other contract losses will be incurred over a maximum period to 2019. (ii) Provision has been made for the estimated net present cost of decommissioning certain generation and gas storage assets. The estimate is based on a forecast of clean-up costs at the time of decommissioning discounted for the time value of money. The timing of costs provided is dependent on the lives of the facilities. In the year to March 2009, the Group has also increased the provision in relation to its projected decommissioning obligations under the EU Waste Electrical and Electronic Equipment (WEEE) directive, which passed into law on 2 January 2007, by £0.1m to £3.6m (2008 – £3.5m). (iii) Other provisions include balances held in relation to restructuring, insurance and warranty claims. In addition, the Group has an employer financed retirement benefit provision for pensions for certain directors and former directors and employees.

The Company does not hold provisions.

25. SHARE CAPITAL Number (millions) £m Company Equity: ordinary shares of 50p each: 1,200.0 600.0 Authorised: At 31 March 2009 and 1 April 2008

Allotted, called up and fully paid: At 1 April 2008 870.1 435.1

Issue of shares (i) 1.2 0.6 FINANCIAL STATEMENTS Conversion of convertible debt to equity (ii) 7.1 3.5 Equity placement (iii) 42.0 21.0 At 31 March 2009 920.4 460.2

The Company has one class of ordinary share which carries no right to fixed income. The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at meetings of the Company.

(i) The Company issued 1.2 million (2008 – 0.4 million) shares during the year under the savings-related share option schemes, and discretionary share option schemes for a consideration of £8.1m (2008 – £2.2m). During the year, on behalf of the Company, the employee share trust purchased 1.1 million shares for a consideration of £15.8m (2008 – 0.8 million shares, consideration of £12.4m). At 31 March 2009, the trust held 3.7 million shares (2008 – 2.7 million) which had a market value of £41.4m (2008 – £37.8m). (ii) During the year, the Company issued a total of 7.1 million shares (2008 – 24.5 million) under the terms of the convertible bond at conversion rates of £9.00 (4.1 million shares) and £8.88 (3.0 million shares) per ordinary share. (iii) In the year, the Company issued 42 million shares following the equity placement announcement in January 2009. The shares were issued at £11.40 and equated to 4.8% of the issued share capital. Transaction costs associated with the placement of £7.3m were netted against the proceeds from the issue.

Scottish and Southern Energy 120 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

26. RESERVES Share Capital premium redemption Equity Hedge Translation Retained Minority account reserve reserve reserve reserve earnings interest Total £m £m £m £m £m £m £m £m Consolidated Reconciliation of movement in reserves At 1 April 2007 99.1 13.7 14.6 (10.5) – 2,048.0 – 2,164.9 Profit for the year – – – – – 872.9 0.3 873.2 Effective portion of changes in fair-value of cash flow hedges – – – 11.6 – – – 11.6 Transferred to income and expense on cash flow hedges – – – 8.0 – – – 8.0 Effective net investment hedge (net of tax) – – – – (21.1) – – (21.1) Premium on issue of shares 2.0 – – – – – – 2.0 Repurchase of shares – 8.3 – – – (239.8) – (231.5) Convertible bond converted to equity 214.6 – (10.7) – – – – 203.9 Exchange differences on translation of foreign operation – – – – 46.5 – – 46.5 Actuarial losses on retirement benefit schemes (net of tax) – – – – – (17.4) – (17.4) Jointly controlled entities: Share of change in fair-value of effective cash flow hedges – – – (6.8) – – – (6.8) Share of actuarial gains on retirement benefit schemes (net of tax) – – – – – 16.4 – 16.4 Dividends to shareholders – – – – – (502.8) – (502.8) Credit in respect of employee share awards – – – – – 10.8 – 10.8 Investment in own shares – – – – – (12.4) – (12.4) Current and deferred tax recognised in equity in respect of employee share awards (note 8) – – – – – (0.1) – (0.1) At 31 March 2008 315.7 22.0 3.9 2.3 25.4 2,175.6 0.3 2,545.2 Premium on issue of shares 458.0 – – – – – – 458.0 Convertible bond converted to equity 61.6 – (3.1) – – – – 58.5 Profit for the year – – – – – 112.3 – 112.3 Effective portion of changes in fair-value of cash flow hedges – – – 16.5 – – – 16.5 Effective net investment hedge (net of tax) – – – – (102.9) – – (102.9) Exchange differences on translation of foreign operation – – – (2.4) 224.1 – – 221.7 Actuarial losses on retirement benefit schemes (net of tax) – – – – – (200.8) – (200.8) Jointly controlled entities: Share of change in fair-value of effective cash flow hedges – – – 3.2 – – – 3.2 Share of actuarial losses on retirement benefit schemes (net of tax) – – – – – (38.3) – (38.3) Dividends to shareholders – – – – – (551.9) (2.6) (554.5) Credit in respect of employee share awards – – – – – 14.3 – 14.3 Investment in own shares – – – – – (15.8) – (15.8) Current and deferred tax recognised in equity in respect of employee share awards (note 8) – – – – – (2.7) – (2.7) At 31 March 2009 835.3 22.0 0.8 19.6 146.6 1,492.7 (2.3) 2,514.7

Scottish and Southern Energy 121 Annual Report 2009

Share Capital premium redemption Equity Hedge Retained account reserve reserve reserve earnings Total £m £m £m £m £m £m Company Reconciliation of movement in reserves At 1 April 2007 99.1 13.7 14.6 (10.9) 591.9 708.4 Profit for the year – – – – 550.6 550.6 Effective portion of changes in fair-value of cash flow hedges – – – 18.0 – 18.0 Premium on issue of shares 2.0 – – – – 2.0 Convertible bond converted to equity 214.6 – (10.7) – – 203.9 Repurchase of ordinary shares for cancellation – 8.3 – – (239.8) (231.5) Actuarial gains on retirement benefit schemes (net of tax) – – – – (43.3) (43.3) Investment in own shares – – – – (12.4) (12.4) Increase in investment in subsidiaries – – – – 10.8 10.8 Dividends to shareholders – – – – (502.8) (502.8) Current and deferred tax recognised in equity in respect of employee share awards – – – – (0.1) (0.1) Other movements – – – – 1.3 1.3 At 31 March 2008 315.7 22.0 3.9 7.1 356.2 704.9 Premium on issue of shares 458.0 – – – – 458.0 Convertible bond converted to equity 61.6 – (3.1) – – 58.5 Profit for the year – – – – 852.0 852.0 Effective portion of changes in fair-value of cash flow hedges – – – 36.2 – 36.2 Actuarial gains on retirement benefit schemes (net of tax) – – – – (78.0) (78.0) Investment in own shares – – – – (15.8) (15.8) Increase in investment in subsidiaries – – – – 14.3 14.3 Dividends to shareholders – – – – (551.9) (551.9) At 31 March 2009 835.3 22.0 0.8 43.3 576.8 1,478.2

The profit for the year attributable to shareholders dealt with in the financial statements of the Company was £852.0m (2008 – £550.6m). As allowed by section 230 of the Companies Act 1985, the Company has not presented its own income statement. The translation reserve reported in the previous year has been reported as part of retained earnings brought forward.

The capital redemption reserve comprises the value of shares redeemed or purchased by the company from distributable profits.

The hedge reserve comprises the effective portion of the cumulative net change in the fair-value of cash flow hedge derivative instruments related to hedged transactions that have not yet occurred.

The equity reserve comprises the equity component of the Group’s convertible bond (note 22).

The translation reserve comprises exchange translation differences on foreign currency net investments offset by exchange translation differences on borrowings and derivatives classified as net investment hedges under IAS 39.

27. RETIREMENT BENEFIT OBLIGATIONS

Defined benefit schemes FINANCIAL STATEMENTS The Group has two funded final salary pension schemes which provide defined benefits based on final pensionable pay. The schemes are subject to independent valuations at least every three years. The future benefit obligations are valued by actuarial methods on the basis of an appropriate assessment of the relevant parameters. The Company operates one of these schemes, being the Scottish Hydro-Electric scheme.

The Group also has an Employer Financed Retirement Benefit scheme and a Group Personal Pension Plan. The Group Personal Pension Plan operates on a Money purchase basis and has been arranged with Friends Provident. The Company matches employee contributions up to a specified limit, in most circumstances this is set at 6%. The Company may also provide additional contributions of 3% after five and ten year’s continuous Company service. Scottish and Southern Energy 122 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

27. RETIREMENT BENEFIT OBLIGATIONS (continued)

Pension summary: Net actuarial gain/(loss) recognised in respect of the pension Net pension Scheme type asset in the SoRIE (liability)/asset 2009 2008 2009 2008 £m £m £m £m Scottish Hydro Electric (Company) Defined benefit (188.4) 146.3 – 85.8 Southern Electric Defined benefit (170.6) 38.7 (273.5) (134.9) (359.0) 185.0 (273.5) (49.1)

The Scottish Hydro Electric Pension Scheme net asset of £nil (2008 – £85.8m) is presented after an irrecoverable surplus restriction of £130.5m (2008 – £210.6m). The Company is only able to recognise the surplus to the extent that it is expected to be recoverable from estimated reductions to scheme contribution rates.

The individual pension scheme details based on the latest formal actuarial valuations are as follows:

Scottish Hydro Electric Southern Electric Latest formal actuarial valuation 31 March 2006 31 March 2007 Valuation carried out by Hymans Robertson Hewitt, Bacon & Woodrow

Value of assets based on valuation £970.0m £1,101.5m Value of liabilities based on valuation £942.0m £1,361.3m Valuation method adopted Projected Unit Projected Unit Average salary increase 5.3% 5.2% Average pension increase 3.0% 3.2% Value of fund assets/accrued benefits 103.0% 80.9%

Both schemes have been updated to 31 March 2009 by qualified independent actuaries. The valuations have been prepared for the purposes of meeting the requirements of IAS 19. The major assumptions used by the actuaries in both schemes were:

At At 31 March 2009 31 March 2008 Rate of increase in pensionable salaries 4.5% 5.0% Rate of increase in pension payments 3.0% 3.5% Discount rate 6.7% 6.9% Inflation rate 3.0% 3.5%

The assumptions relating to longevity underlying the pension liabilities at 31 March 2009 are based on standard actuarial mortality tables, and include an allowance for future improvements in longevity. The assumptions equivalent to future longevity for members in normal health at age 65 are as follows: At At At At 31 March 2009 31 March 2009 31 March 2008 31 March 2008 Male Female Male Female Currently aged 65 22 24 21 23 Currently aged 45 24 27 23 25

The impact on the schemes liabilities of changing certain of the major assumptions is as follows:

At 31 March 2009 At 31 March 2008 Increase/ Effect on Increase/ Effect on decrease in scheme decrease in scheme assumption liabilities assumption liabilities Discount rate 0.1% +/-1.6% 0.1% +/-1.6% Currently aged 45 1 year +/-3.0% 1 year +/-3.0%

Scottish and Southern Energy 123 Annual Report 2009

Valuation of combined pension schemes Consolidated Company Long-term Long-term Long-term Long-term rate of return rate of return rate of return rate of return expected at Value at expected at Value at expected at Value at expected at Value at 31 March 31 March 31 March 31 March 31 March 31 March 31 March 31 March 2009 2009 2008 2008 2009 2009 2008 2008 % £m % £m % £m % £m Equities 7.7 665.8 8.0 939.6 7.7 318.2 8.0 383.1 Government bonds 4.2 576.7 4.5 481.5 4.2 361.2 4.5 268.5 Corporate bonds 6.7 244.3 6.9 343.0 6.7 94.6 6.9 232.3 Other investments 3.4 300.0 5.6 316.9 4.3 86.0 5.6 121.7 Total fair-value of plan assets 1,786.8 2,081.0 860.0 1,005.6 Irrecoverable surplus (130.5) (210.6) (130.5) (210.6) Present value of defined benefit obligation (1,929.8) (1,919.5) (729.5) (709.2) (Deficit)/surplus in the scheme (273.5) (49.1) – 85.8 Deferred tax thereon 76.6 13.7 – (24.0) Net pension (liability)/asset (196.9) (35.4) – 61.8

Movements in the defined benefit obligation during the year Consolidated Company 2009 2008 2009 2008 £m £m £m £m At 1 April (1,919.5) (2,202.3) (709.2) (862.1) Movements in the year: Service costs (21.8) (29.2) (8.7) (12.1) Member contributions (8.1) (7.5) (3.3) (2.8) Benefits paid 96.5 95.0 38.1 36.3 Interest on pension scheme liabilities (130.1) (117.4) (48.0) (46.0) Actuarial gains 53.2 341.9 1.6 177.5 At 31 March (1,929.8) (1,919.5) (729.5) (709.2)

Movements in scheme assets during the year Consolidated Company 2009 2008 2009 2008 £m £m £m £m At 1 April 1,870.4 2,110.4 795.0 990.2 Movements in the year: Expected return on pension scheme assets 135.3 141.4 64.7 66.7 Assets distributed on settlement (96.5) (95.0) (38.1) (36.3) Employer contributions 71.1 73.6 14.5 13.4 Member contributions 8.1 7.5 3.3 2.8 Actuarial (losses) (412.2) (156.9) (190.0) (31.2) Irrecoverable surplus 80.1 (210.6) 80.1 (210.6)

At 31 March 1,656.3 1,870.4 729.5 795.0 FINANCIAL STATEMENTS

Charges/(credits) recognised Consolidated Company 2009 2008 2009 2008 £m £m £m £m Current service cost (charged to operating profit) 21.8 29.2 8.7 12.1 21.8 29.2 8.7 12.1 Charged/(credited) to finance costs: Expected return on pension scheme assets (135.3) (141.4) (64.7) (66.7) Interest on pension scheme liabilities 130.1 117.4 48.0 46.0 (5.2) (24.0) (16.7) (20.7)

Scottish and Southern Energy 124 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

27. RETIREMENT BENEFIT OBLIGATIONS (continued)

History of surplus/(deficit) Consolidated Company 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 £m £m £m £m £m £m £m £m £m £m Total fair-value of plan assets 1,786.8 2,081.0 2,110.4 2,017.3 1,651.3 860.0 1,005.6 990.2 955.8 785.8 Irrecoverable surplus (130.5) (210.6) – – – (130.5) (210.6) – – – Present value of defined benefit obligation (1,929.8) (1,919.5) (2,202.3) (2,211.1) (1,878.9) (729.5) (709.2) (862.1) (865.6) (686.9) (Deficit)/surplus in the scheme (273.5) (49.1) (91.9) (193.8) (227.6) – 85.8 128.1 90.2 98.9

Return on assets As required by IAS 19, the expected return on assets is based on the long-term expectation of returns for each asset class at the beginning of the year. The return on equities is 3.5% per annum in excess of the yield on government bonds. Historical markets are studied and assets with higher volatility are assumed to generate higher returns consistent with widely accepted capital market principles. The assumed long-term rate of return on each asset class is set out within this note. The overall expected rate of return on assets is then derived by aggregating the expected return for each asset class over the actual asset allocation at 31 March 2009.

The actual return on plan assets is as follows: Consolidated Company 2009 2008 2009 2008 £m £m £m £m Actual return on plan assets (276.9) (12.0) (125.3) 35.5

History of experience gains and losses Consolidated Company 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 £m £m £m £m £m £m £m £m £m £m Total actuarial gains and (losses) recognised in the Statement of Recognised Income and Expense before adjustment for taxation (359.0) 185.0 47.4 (14.1) (18.3) (188.4) 146.3 17.6 (29.0) 6.2 Experience (losses) on scheme liabilities (222.2) (122.2) (40.0) (123.3) (38.0) – – – – –

The cumulative actuarial gains and losses recognised in the Statement of Recognised Income and Expense before adjustment for taxation since the adoption of IAS 19 is £318.5m losses (2008 – £81.2m gains).

Defined contribution scheme The total contribution paid by the Group to defined contribution schemes was £13.6m (2008 – £7.1m).

Employer financed retirement benefit (EFRB) pension costs The increase in the year in relation to the EFRB was £2.0m (2008 – £1.1m reduction in the provision). This is included in other provisions (note 24). In addition to the movement in the provision, £0.2m (2007 – £0.6m) was utilised as a result of payments made to the Southern Electric Pension Scheme.

Staff costs analysis The pension costs in note 6 can be analysed thus: 2009 2008 £m £m Service costs 21.8 29.2 Defined contribution scheme payments 13.6 7.1 35.4 36.3

Expected contribution in the year to 31 March 2010 The Group expects to make contributions of £15.3m and £60.3m to the Scottish Hydro Electric Pension Scheme and the Southern Electric Pension Scheme in the year to 31 March 2010, respectively. Scottish and Southern Energy 125 Annual Report 2009

28. EMPLOYEE SHARE-BASED PAYMENTS

The Scottish and Southern Energy Group operates a number of share schemes for the benefit of its employees. Details of these schemes, all of which are equity-settled, are as follows:

(i) Savings-related share option schemes (‘Sharesave’) This scheme gives employees the option to purchase shares in the Company at a discounted market price, subject to the employees remaining in employment for the term of the agreement. Employees may opt to save between £5 and £250 per month for a period of 3 or 5 years. At the end of this period, the employees have six months to exercise their options by using the cash saved (including a bonus equivalent to interest). If the option is not exercised, the funds may be withdrawn by the employee and the option expires.

(ii) Share Incentive Plan (SIP) This scheme allows employees the opportunity to purchase shares in the Company on a monthly basis. Employees may nominate an amount between £10 and £125 to be deducted from their gross salary. This is then used to purchase shares (‘Partnership’ shares) in the market on the final business day of each month. These shares are then held in trust for a period of 5 years, at which point they are transferred at no further cost to the employee. These shares may be withdrawn at any point during the 5 years, but tax and national insurance would then be payable on any amounts withdrawn.

In addition to the shares purchased on behalf of the employee, the Company will also match the purchase up to a maximum of 6 (previously 5) shares (‘Matching’ shares) per month. Again these shares are held in trust for the five years until they are transferred to the employee. If an employee leaves during the first three years, or removes his/her ‘partnership’ shares, these ‘matching’ shares are forfeited.

In addition to the above, the following special awards of free shares have been made:

Award made 31 March 2005 31 March 2007 31 March 2008 Free shares per employee 50 20 10 Date at which employee must still be employed to receive award (in addition to 31 March) 20 August 2005 30 May 2007 1 August 2008

These awards were made to all employees in recognition of their contribution to the success of the company. Under the arrangements for the awards, the shares will be held in trust for five years, at which point they will be transferred to the employees at no cost to the employee. These shares may be withdrawn at any point during years four and five, but income tax and national insurance would then be payable on any amounts withdrawn.

(iii) Deferred bonus scheme This scheme applied to senior managers and executive directors. Those eligible were awarded shares based on performance in the year. These shares were purchased shares and are held in trust on behalf of the employee for a period of three years, at which point the employee is entitled to exercise the award. In addition to shares purchased using the adjusted bonus award, additional shares will also be purchased by the Trustee using amounts received equivalent to any dividends which would have been received on the shares held by the trust. If the employee resigns, they lose all outstanding awards.

This scheme has been replaced by the current Annual Bonus Scheme. Under this scheme, 25% of all eligible employees’ annual bonus is deferred into shares which only vest after three years, subject to continued service. The number of shares awarded is determined by dividing the relevant pre-tax bonus amount by the share price shortly after the announcement of the results for

the financial year to which the bonus relates. FINANCIAL STATEMENTS

(iv) Performance Share Plan This scheme applies to executive directors and senior executives. The level of these awards are subject to certain performance conditions over the three year performance period, which can be summarised as follows:

Date of award 27 July 2006 26 July 2007 10 June 2008 Maximum value of award as a % of base salary 100 150 150

Performance conditions Total shareholder return (50% of award) (i) Full vesting > 75th percentile > 75th percentile > 75th percentile 25% vesting – median median 30% vesting median – –

Earnings per share (50% of award) (ii) Full vesting RPI + 8% RPI + 9% RPI + 9% 25% vesting – RPI + 3% RPI + 3% 30% vesting RPI + 3% – – Scottish and Southern Energy 126 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

28. EMPLOYEE SHARE-BASED PAYMENTS (continued)

These awards will vest after three years to the extent that certain performance conditions are met.

(i) Total Shareholder Return (TSR) target relative to other FTSE 100 companies over the performance period. Pro rata vesting will take place between the median and 75th percentile, with no vesting if the minimum target is not met.

(ii) Under the EPS performance condition, pro rata vesting between 3% and the upper level above RPI, with no vesting if the minimum EPS growth target is not achieved.

As allowed by IFRS 2, only options granted since 7 November 2002, which were unvested at 1 January 2005, have been included.

A charge of £14.3m (2008 – £10.8m) was recognised in the Income Statement in relation to these schemes.

Details used in the calculation of the costs of these schemes are as follows:

(i) Savings-related share option scheme

The movement in savings related share option schemes in the year were as follows:

Consolidated

As at 31 March 2009 Option Outstanding Outstanding Date Price at start at end from which Expiry Award Date (pence) of year Granted Exercised Lapsed of year exercisable date 25 July 2003 562 786,541 – (775,473) (4,332) 6,736 1 October 2008 31 March 2009 16 July 2004 622 3,516 – (3,033) (483) – 1 October 2007 31 March 2008 16 July 2004 622 547,803 – (3,093) (8,336) 536,374 1 October 2009 31 March 2010 14 July 2005 886 359,570 – (350,829) (4,739) 4,002 1 October 2008 31 March 2009 14 July 2005 886 1,127,221 – (4,345) (28,605) 1,094,271 1 October 2010 31 March 2011 11 July 2006 999 385,885 – (3,051) (19,389) 363,445 1 October 2009 31 March 2010 11 July 2006 999 632,609 – (1,554) (38,615) 592,440 1 October 2011 31 March 2012 10 July 2007 1,306 309,354 – (288) (33,826) 275,240 1 October 2010 31 March 2011 10 July 2007 1,306 594,317 – – (57,421) 536,896 1 October 2012 31 March 2013 17 July 2008 1,274 – 358,938 – (25,940) 332,998 1 October 2011 31 March 2012 17 July 2008 1,274 – 681,826 – (37,078) 644,748 1 October 2013 31 March 2014 4,746,816 1,040,764 (1,141,666) (258,764) 4,387,150

As at 31 March 2008 Option Outstanding Outstanding Date Price at start at end from which Expiry Award Date (pence) of year Granted Exercised Lapsed of year exercisable date 25 July 2003 562 3,169 – (1,066) (2,103) – 1 October 2006 31 March 2007 25 July 2003 562 802,001 – (5,235) (10,225) 786,541 1 October 2008 31 March 2009 16 July 2004 622 292,442 – (285,960) (2,966) 3,516 1 October 2007 31 March 2008 16 July 2004 622 565,246 – (1,867) (15,576) 547,803 1 October 2009 31 March 2010 14 July 2005 886 377,722 – (5,192) (12,960) 359,570 1 October 2008 31 March 2009 14 July 2005 886 1,159,491 – (458) (31,812) 1,127,221 1 October 2010 31 March 2011 11 July 2006 999 416,848 – (2,825) (28,138) 385,885 1 October 2009 31 March 2010 11 July 2006 999 669,139 – (341) (36,189) 632,609 1 October 2011 31 March 2012 10 July 2007 1,306 – 316,861 (22) (7,485) 309,354 1 October 2010 31 March 2011 10 July 2007 1,306 – 610,452 – (16,135) 594,317 1 October 2012 31 March 2013 4,286,058 927,313 (302,966) (163,589) 4,746,816

As share options are exercised continuously throughout the year, the weighted average share price during the period of 1,290p (2008 – 1,503p) is considered representative of the weighted average share price at the date of exercise. The weighted average share price of forfeitures is simply the option price to which the forfeit relates. Scottish and Southern Energy 127 Annual Report 2009

Company

As at 31 March 2009 Option Outstanding Outstanding Date price at start at end from which Expiry Award Date (pence) of year Granted Exercised of year exercisable date 25 July 2003 562 1,700 – (1,700) – 1 October 2008 31 March 2009 16 July 2004 622 1,681 – – 1,681 1 October 2009 31 March 2010 14 July 2005 886 3,655 – – 3,655 1 October 2010 31 March 2011 10 July 2007 1,306 144 – – 144 1 October 2010 31 March 2011 17 July 2008 1,274 – 442 – 442 1 October 2011 31 March 2012 7,180 442 (1,700) 5,922

As at 31 March 2008 Option Outstanding Outstanding Date price at start at end from which Expiry Award Date (pence) of year Granted of year exercisable date 25 July 2003 562 1,700 – 1,700 1 October 2008 31 March 2009 16 July 2004 622 1,681 – 1,681 1 October 2009 31 March 2010 14 July 2005 886 3,655 – 3,655 1 October 2010 31 March 2011 10 July 2007 1,306 – 144 144 1 October 2010 31 March 2011 7,036 144 7,180

No options were forfeited in the year. Of the outstanding options at the end of the year, none were exercisable.

The fair-value of these share options at the measurement date, calculated using the Black-Scholes model, and the assumptions made in that model are as follows:

July 2003 July 2004 July 2005 July 2006 July 2007 July 2008 3 Year 5 Year 3 Year 5 Year 3 Year 5 Year 3 Year 5 Year 3 Year 5 Year 3 Year 5 Year Fair-value of option 97p 105p 108p 117p 126p 137p 217p 227p 287p 313p 304p 339p Expected volatility 17% 17% 17% 17% 15% 15% 19% 19% 25% 25% 28% 28% Risk free rate 4.7% 4.8% 4.7% 4.8% 4.1% 4.2% 4.7% 4.7% 5.8% 5.7% 4.9% 5.0% Expected dividends 4.6% 4.6% 4.6% 4.6% 4.2% 4.2% 4.8% 4.8% 5.3% 5.2% 4.1% 4.2% Term of the option 3 yrs 5 yrs 3 yrs 5 yrs 3 yrs 5 yrs 3 yrs 5 yrs 3 yrs 5 yrs 3 yrs 5 yrs Underlying price at grant date 630p 630p 699p 699p 967p 967p 1,180p 1,180p 1,460p 1,460p 1,397p 1,397p Strike price 562p 562p 622p 622p 886p 886p 999p 999p 1,306p 1,306p 1,274p 1,274p

Expected price volatility was determined by calculating the historical volatility of the Group’s share price over the previous 12 months.

(ii) Share Incentive Plan

Matching Shares Consolidated Company 2009 2008 2009 2008 Weighted Weighted Weighted Weighted FINANCIAL STATEMENTS average price average price average price average price Shares (pence) Shares (pence) Shares (pence) Shares (pence) Outstanding at start of year 994,453 1,170 750,971 1,034 1,180 1,071 940 959 Granted during the year 397,958 1,260 287,023 1,506 260 1,260 240 1,507 Forfeited during the year (103,503) 887 (26,235) 1,211 (140) 887 – – Exercised during the year (28,532) 1,290 (17,306) 1,503 – – – – Outstanding at end of year 1,260,376 1,248 994,453 1,170 1,300 1,129 1,180 1,071 Exercisable at end of year 334,530 1,238 204,167 747 560 817 480 747

As shares are exercised continuously throughout the year, the weighted average share price during the period of 1,290p (2008 – 1,503p) is considered representative of the weighted average share price at the date of exercise.

The fair-value of shares in the share incentive plan is not subject to valuation using the Black-Scholes model. However, the fair-value of shares granted in the year is equal to the weighted average price and is based on the price paid for the shares at the grant date as shares are acquired out of the market as at that date to satisfy awards made under the scheme. Scottish and Southern Energy 128 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

28. EMPLOYEE SHARE-BASED PAYMENTS (continued)

Free shares Consolidated Company 2009 2008 2009 2008 Weighted Weighted Weighted Weighted average price average price average price average price Shares (pence) Shares (pence) Shares (pence) Shares (pence) Outstanding at start of year 648,230 1,161 433,300 965 280 1,113 200 965 Granted during the year 151,440 1,417 245,020 1,484 40 1,417 80 1,484 Forfeited during the year (23,360) 1,161 (22,860) 1,182 – – – – Exercised during the year (50,581) 1,290 (7,230) 1,503 – – – – Outstanding at end of year 725,729 1,205 648,230 1,161 320 1,151 280 1,113 Exercisable at end of year 362,567 965 – – 200 965 – –

As shares are exercised continuously throughout the year, the weighted average share price during the period of 1,290p (2008 – 1,503p) is considered representative of the weighted average share price at the date of exercise.

The fair-value of these shares is not subject to valuation using the Black-Scholes model. However, the fair-value of shares granted in the year is equal to the weighted average price and is based on the price paid for the shares at the grant date as shares are acquired out of the market as at that date to satisfy awards made under the scheme.

(iii) Deferred bonus scheme Consolidated Company 2009 2008 2009 2008 Weighted Weighted Weighted Weighted average price average price average price average price Shares (pence) Shares (pence) Shares (pence) Shares (pence) Outstanding at start of year 574,484 1,273 600,030 976 316,349 984 340,970 924 Granted during the year 167,802 1,545 118,276 1,455 27,752 1,545 33,666 1,455 Forfeited during the year (3,715) 1,273 (2,189) 1,220 – – – – Exercised during the year (126,096) 1,386 (141,633) 1,452 (52,493) 1,401 (58,287) 1,434 Outstanding at end of year 612,475 1,324 574,484 1,273 291,608 961 316,349 984 Exercisable at end of year 205,434 789 105,330 665 104,041 789 72,635 665

The fair-value of the deferred bonus shares is not subject to valuation using the Black-Scholes model. However, the fair-value of shares granted in the year is equal to the weighted average price and is based on the price paid for the shares at the grant date as shares are acquired out of the market as at that date to satisfy awards made under the scheme.

(iv) Performance Share Plan Consolidated Company 2009 2008 2009 2008 Weighted Weighted Weighted Weighted average price average price average price average price Shares (pence) Shares (pence) Shares (pence) Shares (pence) Outstanding at start of year 630,567 1,347 256,554 1,220 367,877 1,345 151,351 1,220 Granted during the year 504,456 1,545 374,013 1,434 225,245 1,545 216,526 1,434 Outstanding at end of year 1,135,023 1,435 630,567 1,347 593,122 1,421 367,877 1,345

Of the outstanding options at the end of the year, none were exercisable.

The fair-value of the performance share plan shares is not subject to valuation using the Black-Scholes model. The fair-value of shares granted in the year is equal to closing market price on the date of grant.

29. FINANCIAL INSTRUMENTS AND RISK

This note presents information about the fair-value of the Group’s financial instruments, the Group’s exposure to the risks associated with those instruments, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further qualitative disclosures are included throughout these consolidated financial statements.

The Group has exposure to the following risks from its use of financial instruments: Scottish and Southern Energy 129 Annual Report 2009

(i) Credit risk (ii) Liquidity risk and Going Concern (iii) Commodity risk (iv) Currency risk (v) Interest rate risk

The Board has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board established the Risk and Trading Committee, a standing committee of the Board comprising three executive directors and senior managers from the Generation and Supply and Finance functions, to oversee the control of these activities. This committee is discussed further in the Directors Report.

The Group’s policies for risk management are established to identify the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. These policies, and the systems used to monitor activities, are reviewed regularly by the Risk and Trading Committee.

Exposure to the commodity, currency and interest rate risks noted arise in the normal course of the Group’s business and derivative financial instruments are entered into to hedge exposure to these risks. The objectives and policies for holding or issuing financial instruments and similar contracts, and the strategies for achieving those objectives that have been followed during the year are explained below.

The Company is required to disclose information on its financial instruments and has adopted policies identical to that of the Group, where applicable. Separate disclosure is provided where necessary.

Before detailing the relevant qualitative and quantitative disclosures in relation to the potential risks faced by the Group, details on the different categories of financial instrument and the carrying and fair-values of each of those categories is provided below.

A. CATEGORIES OF FINANCIAL INSTRUMENTS AND FAIR-VALUES OF THOSE ASSETS AND LIABILITIES

The fair-values of the primary financial assets and liabilities of the Group together with their carrying values are as follows:

2009 2009 2009 2009 2008 2008 2008 2008 Amortised Designated Total Amortised Designated Total cost or at fair- carrying Fair- cost or at fair- Carrying Fair- other (i) value (ii) value value other (i) value (ii) value value £m £m £m £m £m £m £m £m Financial assets Current Trade receivables 3,333.3 – 3,333.3 3,333.3 2,042.2 – 2,042.2 2,042.2 Other receivables 481.7 – 481.7 481.7 170.4 – 170.4 170.4 Cash collateral 86.9 – 86.9 86.9 5.6 – 5.6 5.6 Cash and cash equivalents 295.9 – 295.9 295.9 255.3 – 255.3 255.3 Derivative financial assets – 1,537.7 1,537.7 1,537.7 – 1,106.5 1,106.5 1,106.5 4,197.8 1,537.7 5,735.5 5,735.5 2,473.5 1,106.5 3,580.0 3,580.0 Non-current Derivative financial assets – 449.2 449.2 449.2 – 318.9 318.9 318.9 4,197.8 1,986.9 6,184.7 6,184.7 2,473.5 1,425.4 3,898.9 3,898.9 Financial Liabilities

Current FINANCIAL STATEMENTS Trade payables (2,603.6) – (2,603.6) (2,603.6) (1,849.0) – (1,849.0) (1,849.0) Bank loans and overdrafts (1,060.0) – (1,060.0) (1,068.9) (1,847.5) – (1,847.5) (1,848.7) Derivative financial liabilities – (2,451.0) (2,451.0) (2,451.0) – (1,229.4) (1,229.4) (1,229.4) (3,663.6) (2,451.0) (6,114.6) (6,123.5) (3,696.5) (1,229.4) (4,925.9) (4,927.1) Non-current Loans and Borrowings (iii) (4,369.1) 33.4 (4,335.7) (4,472.6) (2,073.1) – (2,073.1) (2,041.9) Derivative financial liabilities – (959.5) (959.5) (959.5) – (313.3) (313.3) (313.3) (4,369.1) (926.1) (5,295.2) (5,432.1) (2,073.1) (313.3) (2,386.4) (2,355.2) (8,032.7) (3,377.1) (11,409.8) (11,555.6) (5,769.6) (1,542.7) (7,312.3) (7,282.3)

Net financial liabilities (3,834.9) (1,390.2) (5,225.1) (5,370.9) (3,296.1) (117.3) (3,413.4) (3,383.4)

(i) Recorded at amortised cost or loans and receivables. (ii) IAS 39 financial instruments. (iii) Includes non-recourse borrowings. Scottish and Southern Energy 130 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

A. CATEGORIES OF FINANCIAL INSTRUMENTS AND FAIR-VALUES OF THOSE ASSETS AND LIABILITIES (continued)

The fair-values of the primary financial assets and liabilities of the Company together with their carrying values are as follows:

2009 2009 2009 2009 2008 2008 2008 2008 Amortised Designated Total Amortised Designated Total cost or at fair- carrying Fair- cost or at fair- carrying Fair- other (i) value (ii) value value other (i) value (ii) value value £m £m £m £m £m £m £m £m Financial assets Current Cash and cash equivalents 135.1 – 135.1 135.1 104.2 – 104.2 104.2 Amounts owed by subsidiary undertakings 3,052.7 – 3,052.7 3,052.7 2,328.5 – 2,328.5 2,328.5 Derivative financial assets – 178.1 178.1 178.1 – 1.1 1.1 1.1 3,187.8 178.1 3,365.9 3,365.9 2,432.7 1.1 2,433.8 2,433.8 Non-current Amounts owed by subsidiary undertakings 2,066.9 – 2,066.9 2,066.9 1,772.7 – 1,772.7 1,772.7 5,254.7 178.1 5,432.8 5,432.8 4,205.4 1.1 4,206.5 4,206.5 Financial Liabilities Current Bank loans and overdrafts (900.8) – (900.8) (900.8) – – – – Convertible bond (15.6) – (15.6) (19.6) – – – – Amounts owed to subsidiary undertakings (2,517.2) – (2,517.2) (2,517.2) (3,526.7) – (3,526.7) (3,526.7) Derivative financial liabilities – (130.8) (130.8) (130.8) – – – – (3,433.6) (130.8) (3,564.4) (3,568.4) (3,526.7) – (3,526.7) (3,526.7) Non-current Loans and borrowings (2,661.7) 33.4 (2,628.3) (2,841.5) (372.4) – (372.4) (414.1) Amounts owed to subsidiary undertakings (240.2) – (240.2) (240.2) (240.2) – (240.2) (240.2) (2,901.9) 33.4 (2,868.5) (3,081.7) (612.6) – (612.6) (654.3) (6,335.5) (97.4) (6,432.9) (6,650.1) (4,139.3) – (4,139.3) (4,181.0)

Net financial (liabilities)/asset (1,080.8) 80.7 (1,000.1) (1,217.3) 66.1 1.1 67.2 25.5

(i) Recorded at amortised cost or loans and receivables. (ii) IAS 39 financial instruments.

Basis of determining fair-value Certain assets and liabilities designated and carried at amortised cost are loans and receivables. For certain current assets and liabilities their carrying value is equivalent to fair-value due to short term maturity.

Assets and liabilities designated at fair-value and the fair-value of other financial assets and liabilities have been determined by reference to closing rate market values. This basis has been used in valuing interest rate instruments, foreign currency hedge contracts and denominated long-term fixed rate debt. Commodity contracts fair-values are based on published price quotations.

The fair-values are stated at a specific date and may be different from the amounts which will actually be paid or received on settlement of the instruments. The fair-value of items such as property, plant and equipment, internally generated brands or the Group’s customer base are not included as these are not financial instruments. Scottish and Southern Energy 131 Annual Report 2009

B. RISKS FROM USE OF FINANCIAL INSTRUMENTS

(i) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual obligations.

Credit risk arising from the Group’s normal commercial operations is controlled by individual business units operating in accordance with Group policies and procedures. Generally, for significant contracts, individual business units enter into contracts or agreements with counterparties having investment grade credit ratings only, or where suitable collateral or other security has been provided. Counterparty credit validation is undertaken prior to contractual commitment.

Credit risk management for the Group’s regulated businesses is performed in accordance with industry standards as set out by the Regulator and is controlled by the individual business units. The Group’s greatest credit risks lie with the non-regulated operations of the Generation and Supply business and the activities carried out by the Group’s Treasury function, for which specific credit risk controls that match the risk profile of those activities are applied.

Exposure to credit risk in the supply of electricity and gas arises from the potential of a customer defaulting on their invoiced payables. The financial strength and creditworthiness of business customers is assessed prior to commencing, and for the duration of, their contract of supply. Domestic customers’ creditworthiness is reviewed from a variety of internal and external information.

Exposure to credit risk in the procurement of wholesale energy and fuel is managed by reference to agreed transaction credit limits which are determined by whether the counterparty:

(i) holds an investment grade credit rating; or

(ii) can be assessed as adequately creditworthy in accordance with internal credit rules using information from other external credit agencies; or

(iii) can provide a guarantee from an investment grade rated entity or post suitable collateral or provide other acceptable assurances in accordance with group procedures where they have failed to meet the above conditions; or

(iv) can be allocated a non-standard credit limit approved by the Risk Committee within its authorised limits as delegated by the Group Board.

Credit support clauses or side agreements are typically included or entered into to protect the Group against counterparty failure or non-delivery. Within the Generation and Supply business, increasing volumes of commodity derivative products are now traded through cleared exchanges to further mitigate credit risk. Such exchanges are subject to strict regulation by the UK Financial Services Authority (FSA) and participants in these exchanges are obliged to meet rigorous capital adequacy requirements.

Individual counterparty credit exposures are monitored by category of credit risk and are subject to approved limits. At 31 March 2009, the Group’s Generation and Supply business had pledged £221m (2008 – £135m) of cash collateral and letters of credit and had received £28m (2008 – £74m) of cash collateral and letters of credit principally to reduce exposures on commodity price risk.

Bank credit exposures, which are monitored and reported on daily, are calculated on a mark-to-market basis and adjusted for future volatility and probability of default. Any issues relating to these credit exposures are presented for discussion and review by the Risk Committee.

Cash and cash equivalents comprise cash in hand and deposits which are readily convertible to cash. These are subject to insignificant risk of change in value or credit risk. Derivative financial instruments are entered into to cover the Group’s market risks – commodity FINANCIAL STATEMENTS risk, interest rate risk, currency risk – and are consequently covered elsewhere in this note.

Trade receivables represent the most significant exposure to credit risk and are stated net of collateral held, letters of credit or other credit enhancements. The trade receivables total includes an allowance for impairment. Scottish and Southern Energy 132 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

B. RISKS FROM USE OF FINANCIAL INSTRUMENTS (continued)

Concentrations of risk Trade receivables recorded by reported segment held at the 31 March were: 2009 2008 £m £m Power Systems Scotland 20.0 18.6 England 35.6 19.7 55.6 38.3 Generation and Supply Retail customers 994.6 554.0 Wholesale and trading receivables 1,978.0 1,165.6 Other 113.5 74.7 Other businesses 191.6 209.6 3,333.3 2,042.2

The Generation and Supply segment accounts for 92.6% (2008 – 87.9%) of the Group’s trade receivables. Trade receivables associated with the Group’s 9.05 million electricity and gas customers are recorded in this segment. The Group also has significant receivables associated with its wholesale and trading activities which are generally settled within 2 to 4 weeks from invoicing. The Group’s exposure to credit risk is therefore subject to diversification with no exposure to individual customers totalling >10% of trade receivables. The Group’s biggest customer balance, due from a wholesale electricity customer, is less than 6% (2008 – 5%) of the total.

The ageing of trade receivables at the reporting date was: 2009 2008 £m £m Not past due 3,008.1 1,873.8 Past due but not individually impaired: 0-30 days 192.6 106.0 31-90 days 96.0 61.6 Over 90 days 163.3 116.5 3,460.0 2,157.9 Less: allowance for impairment (126.7) (115.7) Net trade receivables 3,333.3 2,042.2

The Group has past due debt which has not had an impairment allowance set aside to cover potential credit losses. The Group has procedures to pursue customers in significant arrears and believes its impairment policy in relation to such balances is appropriate. Those debts which are neither past due nor impaired are expected to be recoverable.

The Group has other receivables which are financial assets totalling £481.7m (2008 – £176.0m). The Company does not have trade receivables.

The movement in the allowance for impairment of trade receivables was: 2009 2008 £m £m Balance at 1 April 115.7 85.3 Increase in allowance for impairment 35.2 69.5 Impairment losses recognised (39.9) (50.2) Recovery of impairment loss previously recognised 15.7 8.6 Acquired allowance – 2.5 Balance at 31 March 126.7 115.7

At the end of each reporting period a review of the provision for bad and doubtful debts is performed. It is an assessment of the potential amount of trade receivables which will not be paid by customers after the balance sheet date. This amount is calculated by reference to the age, status and risk of each receivable. Scottish and Southern Energy 133 Annual Report 2009

(ii) Liquidity risk and Going Concern Liquidity risk, the risk that the Group will have insufficient funds to meet its liabilities, is managed by the Group’s Treasury function. The Group can have significant movements in its liquidity position due to movements in commodity prices, working capital requirements, the seasonal nature of the business and phasing of its capital expenditure programme.

Treasury is responsible for managing the banking and liquidity requirements of the Group, risk management relating to interest rate and foreign exchange exposures, and for managing the credit risk relating to the banking counterparties with which it transacts. Short term liquidity is reviewed daily by Treasury. The department’s operations are governed by policies determined by the Board and any breaches of these policies are reported to the Risk Committee and Audit Committee. The longer term liquidity position is reviewed on a regular basis by the Board.

In relation to the Group’s liquidity risk, the Group’s policy is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

The Group’s approach to managing liquidity is to seek to ensure that the Group has available committed borrowings and facilities equal to at least 105% of forecast borrowings over a rolling 12 month period. However due to the level of debt refinancing combined with the deteriorating conditions in the capital and banking markets during the latter half of 2008, the Group decided to temporarily relax this test and focus on a shorter rolling period. The Directors consider this to be an acceptable funding policy taking into account the carrying cost of long term debt compared to short term debt.

The Group uses a cash flow forecast to monitor its ongoing borrowing requirements. Typically, the Group will fund any short term borrowing positions by issuing commercial paper or borrowing from uncommitted bank lines and will invest in money market funds when it has a cash surplus. In addition to the borrowing facilities listed at note 21, the Group has £75m of uncommitted bank lines and a £20m overdraft facility.

On 3 April the Group entered into a new £850m revolving credit facility which will mature in June 2012. A further £150m of bilateral facilities have been agreed and approved subject to documentation, and these will also mature in June 2012. At the time of signing the accounts, these facilities were undrawn.

Under the going concern principle, the Group expects to issue medium to long term debt during the year ended 31 March 2010. In addition, liquidity in the commercial paper market and the availability of undrawn committed bank facilities has enabled the Directors to conclude that the Group has sufficient headroom to continue as a going concern. In coming to this conclusion the Directors have taken into account the successful issuance of £2.4bn of medium to long term debt during the year ended 31 March 2009, the Group’s credit rating, the successful renewal and increase of committed bank facilities and current market conditions. The statement of going concern is included in the Directors’ Corporate Governance report on page 61.

Treasury also manage the Group’s interaction with its relationship banks (defined as those banks that support the company’s financing activities through their ongoing participation in the committed lending facilities that are maintained by the Group). These are each allocated financial limits, subject to the maintenance of a minimum credit rating of ‘A’ or equivalent allocated by a recognised major ratings group. In respect of short-term cash management, counterparties are subject to review and approval according to defined criteria.

High volatility in commodity prices during the year has resulted in substantially increased cash amounts being posted in respect of mark-to-market related margin calls on exchange traded positions. As at 31 March 2009, the value of outstanding cash collateral posted totalled £86.9m (2008 – £5.6m), representing a net cash outflow during the year of £81.3m.

The contractual cash flows shown in the following tables are the contractual undiscounted cashflows under the relevant financial FINANCIAL STATEMENTS instruments. Where the contractual cashflows are variable based on a price, foreign exchange rate or index in the future, the contractual cashflows in the following tables have been determined with reference to the relevant price, foreign exchange rate, interest rate or index as at the balance sheet date. In determining the interest element of contractual cashflows in cases where the Group has a choice as to the length of interest calculation periods and the interest rate that applies varies with the period selected, the contractual cashflows have been calculated assuming the Group selects the shortest available interest calculation periods. Where the holder of an instrument has a choice of when to redeem, the amounts in the following tables are on the assumption the holder redeems at the earliest opportunity.

The numbers in the following tables have been included in the Group’s cash flow forecasts for the purposes of considering Liquidity Risks as noted above. Scottish and Southern Energy 134 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

B. RISKS FROM USE OF FINANCIAL INSTRUMENTS (continued)

The following are the contractual liabilities of financial liabilities excluding the impact of netting agreements.

Liquidity risk 2009 2009 2009 2009 2009 2009 2008 2008 2008 2008 2008 2008 Carrying Contractual 0-12 1-2 2-5 > 5 Carrying Contractual 0-12 1-2 2-5 > 5 value cash flows months years years years value cash flows months years years years £m £m £m £m £m £m £m £m £m £m £m £m Financial liabilities Loans and borrowings Bank overdrafts 2.3 (2.3) (2.3) – – – 12.2 (12.2) (12.2) – – – Commercial paper and cash advances 900.8 (904.2) (904.2) – – – 1,696.3 (1,706.7) (1,706.7) – – – Bank loans – floating 220.0 (238.1) (5.9) (74.3) (132.7) (25.2) 150.0 (187.8) (7.8) (7.5) (145.9) (26.6) Bank loans – fixed 520.0 (622.9) (117.8) (57.4) (447.7) – 270.2 (331.0) (39.0) (39.3) (173.0) (79.7) Unsecured bonds – fixed 3,263.7 (6,780.4) (195.8) (195.9) (1,843.7) (4,545.0) 1,073.6 (2,755.0) (53.4) (53.4) (160.6) (2,487.6) Convertible bond 15.6 (16.5) (16.5) – – – 76.3 (83.7) (3.0) (80.7) – – Non-recourse funding 506.7 (689.8) (74.5) (56.0) (154.2) (405.1) 99. 1 (99.0) (8.6) (8.8) (30.5) (51.1) Airtricity debt – – – – – – 542.9 (726.6) (145.9) (214.7) (117.9) (248.1) Fair-value adjustment (33.4) – – – – – – – – – – – 5,395.7 (9,254.2) (1,317.0) (383.6) (2,578.3) (4,975.3) 3,920.6 (5,902.0) (1,976.6) (404.4) (627.9) (2,893.1) Finance lease obligations 0.5 (0.8) (0.1) (0.1) (0.3) (0.3) 0.6 (0.6) (0.2) (0.2) (0.2) – 5,396.2 (9,255.0) (1,317.1) (383.7) (2,578.6) (4,975.6) 3,921.2 (5,902.6) (1,976.8) (404.6) (628.1) (2,893.1) Derivative financial liabilities Operating derivatives designated at fair-value 3,218.4 (2,892.4) (2,497.0) (158.3) (226.0) (11.1) 1,492.3 3,478.0 2,881.2 496.8 78.0 22.0 Interest rate swaps used for hedging 79.3 (79.3) (16.1) (13.1) (31.1) (19.0) 12.8 (12.8) (3.8) (3.7) (4.2) (1.1) Interest rate swaps designated at fair-value 112.3 (112.3) (5.3) (5.3) (14.3) (87.4) 24.4 (24.4) (1.3) (1.3) (3.8) (18.0) Forward exchange contracts held for hedging 0.3 (21.9) (20.6) (0.6) (0.7) – 3.8 (88.8) (58.4) (21.6) (8.8) – Forward exchange contracts designated at fair-value 0.2 (16.5) (16.5) – – – 9.4 (46.5) (9.1) (4.8) (25.2) (7.4) 3,410.5 (3,122.4) (2,555.5) (177.3) (272.1) (117.5) 1,542.7 3,305.5 2,808.6 465.4 36.0 (4.5) Other financial liabilities Trade payables 2,603.6 (2,603.6) (2,603.6) – – – 1,849.0 (1,849.0) (1,849.0) – – – 2,603.6 (2,603.6) (2,603.6) – – – 1,849.0 (1,849.0) (1,849.0) – – –

Total 11,410.3 (14,981.0) (6,476.2) (561.0) (2,850.7) (5,093.1) 7,312.9 (4,446.1) (1,017.2) 60.8 (592.1) (2,897.6)

Derivative financial assets Financing derivatives (178.1) (550.6) (447.3) (24.4) (45.6) (33.3) (35.6) (197.3) (104.8) (27.6) (25.4) (39.5) Operating derivatives designated at fair-value (1,808.8) (1,394.0) (371.8) (833.9) (181.8) (6.5) (1,389.8) (3,957.9) (3,245.7) (497.3) (211.0) (3.9) (1,986.9) (1,944.6) (819.1) (858.3) (227.4) (39.8) (1,425.4) (4,155.2) (3,350.5) (524.9) (236.4) (43.4)

Net total (i) 9,423.4 (16,925.6) (7,295.3) (1,419.3) (3,078.1) (5,132.9) 5,887.5 (8,601.3) (4,367.7) (464.1) (828.5) (2,941.0)

(i) The Group believes the liquidity risk associated with out-of-the-money operating derivative contracts needs to be considered in conjunction with the profile of payments or receipts arising from derivative financial assets. It should be noted that cash flows associated with future energy sales and commodity contracts which are not IAS 39 financial instruments are not included in this analysis, which is prepared in accordance with IFRS 7. Scottish and Southern Energy 135 Annual Report 2009

The Company has the following liquidity maturity profile:

Liquidity risk 2009 2009 2009 2009 2009 2009 2008 2008 2008 2008 2008 2008 Carrying Contractual 0-12 1-2 2-5 > 5 Carrying Contractual 0-12 1-2 2-5 > 5 value cash flows months years years years value cash flows months years years years £m £m £m £m £m £m £m £m £m £m £m £m Financial liabilities Loans and borrowings Commercial paper and cash advances 900.8 (904.2) (904.2) – – – 1,696.3 (1,706.7) (1,706.7) – – – Bank loans – floating 70.0 (72.3) (1.9) (70.4) – – – – – – – – Bank loans – fixed 210.0 (264.8) (12.5) (12.5) (239.8) – – – – – – – Unsecured bonds – fixed 2,381.7 (4,516.8) (155.6) (155.6) (1,722.0) (2,483.6) 296.1 (564.4) (17.6) (17.6) (52.9) (476.3) Convertible bond 15.6 (16.5) (16.5) – – – 76.3 (83.7) (3.0) (80.7) – – Fair-value adjustment (33.4) – – – – – – – – – – – 3,544,7 (5,774.6) (1,090.7) (238.5) (1,961.8) (2,483.6) 2,068.7 (2,354.8) (1,727.3) (98.3) (52.9) (476.3) Derivative financial liabilities Interest rate swaps used for hedging 33.4 (33.4) (7.4) (7.4) (18.6) – 20.4 (20.4) (1.0) (1.0) (3.0) (15.4) Interest rate swaps designated at fair-value 96.8 (96.8) (4.1) (4.1) (12.2) (76.4) – – – – – – Forward exchange contracts held for hedging 0.3 (21.9) (20.6) (0.6) (0.7) – (9.8) (202.8) (90.8) (43.4) (28.8) (39.8) Forward exchange contracts designated at fair-value 0.3 (16.5) (16.5) – – – (11.7) (130.8) (82.1) (10.6) (30.7) (7.4) 130.8 (168.6) (48.6) (12.1) (31.5) (76.4) (1.1) (354.0) (173.9) (55.0) (62.5) (62.6) Other financial liabilities Amounts due to subsidiary undertakings 2,517.2 (2,517.2) (2,517.2) – – – 3,526.7 (3,526.7) (3,526.7) – – – 2,517.2 (2,517.2) (2,517.2) – – – 3,526.7 (3,526.7) (3,526.7) – – –

Total 6,192.7 (8,460.4) (3,656.5) (250.6) (1,993.3) (2,560.0) 5,594.3 (6,235.5) (5,427.9) (153.3) (115.4) (538.9)

Derivative financial assets Financing derivatives (178.1) (550.6) (447.3) (24.4) (45.6) (33.3) – – – – – –

Net total 6,014.6 (9,011.0) (4,103.8) (275.0) (2,038.9) (2,593.3) 5,594.3 (6,235.5) (5,427.9) (153.3) (115.4) (538.9)

(iii) Commodity risk The Group’s Generation and Supply business faces exposure to energy commodity price movements and also to physical commodity FINANCIAL STATEMENTS volume requirements as part of its normal course of business. This arises from the Group’s requirement to source gas or electricity to supply customers, or to procure fuel to produce electricity from its generation assets.

The Group’s strategy is to manage all exposures to commodity risk through volumetric limits and to measure the exposure by use of a Value at Risk (VaR) model. The exposure is subject to financial limits established by the Board and managed by the Risk and Trading Committee and is reported to the Committee on a monthly basis and to the Board when certain trigger levels are exceeded. Within this approach, only certain of the Group’s energy commodity contracts are deemed to constitute financial instruments under IAS 39. As a result, while the Group manages the commodity price risk associated with both financial and non-financial commodity contracts, it is only the fair-value of IAS 39 financial instruments which represents the exposure of the Group’s commodity price risk under IFRS 7. This is a consequence of the accounting policy which requires that commodity contracts which are designated as financial instruments under IAS 39 should be accounted for on a fair-value basis with changes in fair-value reflected in profit or equity. Conversely, commodity contracts that are not financial instruments under IAS 39 are accounted for as ‘own use’ contracts. As fair-value changes in own use contracts are not reflected through profit or equity, these do not represent the IFRS 7 commodity price risk. Therefore, as the overall Group VaR associated with the Generation and Supply business is monitored for internal risk management purposes and is outside the scope of IAS 39, these measures are not required to comply with IFRS 7.

Operationally, the economic risks associated with this exposure are managed through a selection of longer and shorter term contracts for commodities such as gas, electricity, coal and oil, and also the flexibility of the Group’s fleet of generation assets. Scottish and Southern Energy 136 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

B. RISKS FROM USE OF FINANCIAL INSTRUMENTS (continued)

Short-term exposures arise from the requirement to match volumes of procured gas, electricity and power station fuel with demand for gas and electricity by its customers, which can vary from expectations and result in a requirement to close the resulting positions at unfavourable prices. This aspect of commodity risk is managed through the ability to increase or decrease energy production either in the form of flexible purchase contracts or assets such as pumped storage generating plant, flexible hydro generating plant, standby oil plant and gas storage.

Longer-term exposures are managed through the Group’s generation plant and longer term contracts (including forwards, futures contracts and other financial instruments). These, in turn, are used to reduce short-term market exposures.

Certain commodity contracts are entered into primarily for own use purposes to supply to existing customers or to fuel existing power stations. However, as noted, a number of these contracts do not qualify for own use treatment under IAS 39 and are subject to fair-value measurement through the income statement. In addition to this, the Group enters into certain contracts to manage commodity price and volume risk. These are also subject to fair-value measurement through the income statement. Finally, certain other physical contracts are treated as the hedging instrument in documented cash flow hedging relationships where the hedged item is the forecast future purchase requirement to meet production or customer demand. The accounting policies associated with such items are explained in note 1.

The consequential commodity risk which derives from these activities is quantified by the use of a Value at Risk (VaR) model which considers exposures in all commodities and provides an estimate of the potential change to the Groups forecast profits over a given period and to a given confidence level. The calculated financial risk is controlled through the imposition of a number of risk limits approved by the Board and monitored and managed by the Risk Committee. The Group’s exposure to Commodity risk is reported to and monitored by the Risk Committee and to the Board by exception.

The Group’s exposure to commodity price risk according to IFRS 7 is measured by reference to the Group’s IAS 39 commodity contracts. IFRS 7 requires disclosure of a sensitivity analysis for market risks that is intended to illustrate the sensitivity of the Group’s financial position and performance to changes in market variables impacting upon the fair-value or cash flows associated with the Group’s financial instruments.

Therefore, the sensitivity analysis provided discloses the effect on profit or loss and equity at the balance sheet date assuming that a reasonably possible change in the relevant commodity price had occurred, and been applied to the risk exposures in existence at that date. The reasonably possible changes in commodity prices used in the sensitivity analysis were determined based on calculated or implied volatilities where available, or historical data.

The sensitivity analysis has been calculated on the basis that the proportion of commodity contracts that are IAS 39 financial instruments remains consistent with those at that point. Excluded from this analysis are all commodity contracts that are not financial instruments under IAS 39. 2009 2008 Reasonably possible Reasonably possible increase/decrease increase/decrease Base Price (i) in variable Base Price (i) in variable Commodity prices UK gas (p/therm) 59 +/-12 63 +/-10 UK power (£/MWh) 49 +/-10 59 +/-7 UK coal (US$/tonne) 83 +/-18 121 +/-12 UK emissions (€/tonne) 13 +/-4 22 +/-4 UK oil (US$/bbl) 62 +/-15 100 +/-10

(i) The base price represents the average forward market price over the duration of the active market curve used to calculate the sensitivity analysis.

The impacts of reasonably possible changes in commodity prices on profit after taxation based on the rationale described are as follows:

2009 2008 Impact on Impact on Impact on Impact on profit (£m) equity (£m) profit (£m) equity (£m) Incremental profit/(loss) Commodity prices combined – increase 417.4 – (28.9) (0.8) Commodity prices combined – decrease (417.4) – 28.9 0.8

The sensitivity analysis provided is hypothetical and is based on the Group’s commodity contracts under IAS 39. This analysis should be used with caution as the impacts disclosed are not necessarily indicative of the actual impacts that would be experienced. It should also be noted that these sensitivities are based on calculations which do not consider all interrelationships, consequences and effects of such a change in those prices.

(iv) Currency risk The Group publishes its consolidated financial statements in sterling but also conducts business in foreign currencies. As a result, it is subject to foreign currency exchange risk arising from exchange rate movements which will be reflected in the Group’s transaction costs or in the underlying foreign currency assets of its foreign operations. Scottish and Southern Energy 137 Annual Report 2009

The Group’s policy is to use forward contracts, swaps and options to manage its exposures to foreign exchange risk. All such exposures are transactional in nature, and relate primarily to procurement contracts, commodity purchasing and related freight requirements, commodity hedging, long term plant servicing and maintenance agreements, and the purchase and sale of carbon emission certificates. The policy is to seek to hedge 100% of its currency requirements arising under all committed contracts excepting commodity hedge transactions, the requirements for which are significantly less predictable. The policy for these latter transactions is to assess the Group’s requirements on a rolling basis and to enter into cover contracts as appropriate.

Following the acquisition last year of the Airtricity business, the Group has foreign operations with consequent currency exposure issues. The refinancing in the current financial year has sought to match the Group’s net assets whose functional cash flows are denominated in euros, with borrowings held in euros. For net assets whose functional cash flows are in sterling, the Group has ensured sterling denominated borrowings are in place.

Significant exposures are reported to, and discussed by, the Risk and Trading Committee on an ongoing basis and additionally form part of the bi-annual Treasury report to the Audit Committee.

At the balance sheet date, the total nominal value of outstanding forward foreign exchange contracts that the Group has committed to is:

2009 2008 £m £m Forward foreign exchange contracts 1,286.1 916.3

The Group’s exposure to foreign currency risk was as follows: 2009 2008 DKK DKK ¥m (million) €m $m ¥m (million) €m $m Loans and borrowings 28,000.0 – 1,092.0 97.5 – – 1,115.0 100.0 Purchase and commodity contract commitments – 181.3 673.6 1,906.3 – 241.2 203.6 1,936.6 Gross exposure – 181.3 1,765.6 2,003.8 – 241.2 1,318.6 2,036.6

Forward exchange/swap contracts 28,000.0 181.3 333.9 967.5 – 241.2 202.4 1,458.9

Net exposure (in currency) – – 1,431.7 1,036.3 – – 1,116.2 577.7 Net exposure (in £m) – – 1,324.7 724.7 – – 888.1 290.8

This represents the net exposure to foreign currencies, reported in pounds sterling, and arising from all group activities. All sensitivity analysis has been prepared on the basis of the relative proportions of instruments in foreign currencies being consistent as at the balance sheet date. This includes only monetary assets and liabilities denominated in a currency other than sterling and excludes the translation of the net assets of foreign operations but not the corresponding impact of the net investment hedge.

The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually changing. The calculations are based on linear extrapolations of rate changes which may not reflect the actual result which would impact upon the Group.

A 10% change in foreign currency exchange rates would have had the following impact on profit after taxation, based on the

assumptions presented above: FINANCIAL STATEMENTS Equity Income Statement At At At At 31 March 2009 31 March 2008 31 March 2009 31 March 2008 £m £m £m £m US Dollars – – 58.0 23.3 Euro 51.9 39.8 54.1 31.3 DKK – – – – ¥ – – – – 51.9 39.8 112.1 54.6

The impact of a decrease in rates would be an identical reduction in the annual charge. There is no impact on equity as the analysis relates to the Group’s net exposure at the balance sheet date. Contracts qualifying for hedge accounting are, by definition, part of the Group’s covered position.

(v) Interest rate risk Interest rate risk derives from the Group’s exposure to changes in the value of an asset or liability or future cash flows through changes in interest rates. Scottish and Southern Energy 138 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

B. RISKS FROM USE OF FINANCIAL INSTRUMENTS (continued)

The Group’s policy is to manage this risk by stipulating that a minimum of 50% of Group borrowings be subject to fixed rates of interest, either directly through the debt instruments themselves or through the use of derivative financial instruments. Such instruments include interest rate swaps and options, forward rate agreements and, in the case of debt raised in currencies other than sterling, cross currency swaps. These practices serve to reduce the volatility of the Group’s financial performance.

Although interest rate derivatives are primarily used to hedge risk relating to current borrowings, under certain circumstances they may also be used to hedge future borrowings. Any such pre-hedging is unwound at the time of pricing the underlying debt, either through cash settlement on a net present value basis or by transacting offsetting trades. The floating rate borrowings mainly comprise commercial paper issued at interest rates of LIBOR plus a variable margin and cash advances from the European Investment Bank (EIB).

The impact of a change in interest rates is dependent on the specific details of the financial asset or liability in question. Changes in fixed rate financial assets and liabilities, which account for the majority of cash, loans and borrowings, are not measured at fair-value through the income statement. In addition to this, changes to fixed-to-floating hedging instruments which are recorded under cash flow hedge accounting also do not impact the income statement. Changes in variable rate instruments and hedging instruments and hedged items recorded under fair-value hedge accounting are recorded through the income statement. The exposure measured is therefore based on variable rate debt and instruments.

The net exposure to interest rates at the balance sheet date can be summarised thus: 2009 2008 Carrying Carrying amount amount £m £m Interest bearing/earning assets and liabilities: – Fixed (4,735.9) (2,381.4) – Floating (553.5) (1,320.4) (5,289.4) (3,701.8) Represented by: Cash and cash equivalents 295.9 255.3 Derivative financial liabilities (155.7) (35.9) Loans and borrowings (5,429.1) (3,920.6) Finance lease obligations (0.5) (0.6) (5,289.4) (3,701.8)

Following from this, the table below represents the expected impact of a change in 100 basis points in short term interest rates at the reporting date in relation to equity and income statement. The analysis assumes that all other variables, in particular foreign currency rates, remain constant. An increase in exchange rates would be a change to either the income statement or equity. The assessment is based on a revision of the fair-value assumptions included in the calculated exposures in the previous table.

All sensitivity analysis has been prepared on the basis of the proportion of fixed to floating instruments being consistent as at the balance sheet date and is stated after the effect of taxation.

The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually changing. The calculations are based on linear extrapolations of rate changes which may not reflect the actual result which would impact upon the Group. 2009 2008 £m £m Income Statement 6.1 13.2 Equity – – 6.1 13.2

The impact of a decrease in rates would be an identical reduction in the annual charge. There is no impact on equity as the analysis relates to the Group’s net exposure at the balance sheet date. Contracts qualifying for hedge accounting are, by definition, part of the Group’s net exposure.

(vi) Income statement disclosures For financial reporting purposes, the Group has classified derivative financial instruments into two categories, operating derivatives and financing derivatives. Operating derivatives include all qualifying commodity contracts including those for electricity, gas, oil, coal and carbon. Financing derivatives include all fair-value and cash flow interest rate hedges, non-hedge accounted (mark-to-market) interest rate derivatives, cash flow foreign exchange hedges and non-hedge accounted foreign exchange contracts. Non-hedge accounted contracts are treated as held for trading. Scottish and Southern Energy 139 Annual Report 2009

The net movement reflected in the Income Statement can be summarised thus: 2009 2008 £m £m Operating derivatives Total result on operating derivatives (i) (3,964.8) 135.7 Less: amounts settled (ii) 2,673.1 (323.5) Movement in unrealised derivatives (1,291.7) (187.8)

Financing derivatives (and hedged items) Total result on financing derivatives (i) 70.5 (116.8) Less: amounts settled (ii) (44.7) 137.5 Movement in unrealised derivatives 25.8 20.7

Net income statement impact (1,265.9) (167.1)

(i) Total result on derivatives in the income statement represents the total amounts (charged) or credited to the income statement in respect of operating and financial derivatives. (ii) Amounts settled in the year represent the result on derivatives transacted which have matured or been delivered and have been included within the total result on derivatives.

The net derivative financial assets and (liabilities) are represented as follows: 2009 2008 £m £m Derivative financial assets Non-current 449.2 318.9 Current 1,537.7 1,106.5 1,986.9 1,425.4 Derivative liabilities Non-current (926.1) (313.3) Current (2,451.0) (1,229.4) (3,377.1) (1,542.7) Fair-value adjustment to hedge item (loans and borrowings) (note 22) (33.4) – Total derivative liabilities (3,410.5) (1,542.7) Net liability (1,423.6) (117.3)

(vii) Cash flow hedges The Group designates contracts which qualify as hedges for accounting purposes either as cash flow hedges or fair-value hedges. Cash flow hedges are contracts entered into to hedge a forecast transaction or cash flow risk generally arising from a change in interest rates or foreign currency exchange rates and which meet the effectiveness criteria prescribed by IAS 39. The Group’s accounting policy on cash flow hedges is explained in note 1.

The following table indicates the contractual maturities of the expected transactions and the qualifying cash flow hedges associated:

Cash flow hedges FINANCIAL STATEMENTS 2009 2009 2009 2009 2009 2009 2008 2008 2008 2008 2008 2008 Carrying Expected 0-12 1-2 2-5 > 5 Carrying Expected 0-12 1-2 2-5 > 5 amount cash flows months years years years amount cash flows months years years years £m £m £m £m £m £m £m £m £m £m £m £m Interest rate swaps: Liabilities (10.0) (10.0) (4.2) (2.6) (3.2) – (5.9) (5.9) (1.8) (1.7) (2.2) (0.2) Forward exchange contracts: Assets 52.2 (556.3) (489.1) (10.9) (23.0) (33.3) 13.1 (114.4) (32.9) (21.8) (19.9) (39.8) Liabilities (0.3) (21.9) (20.6) (0.6) (0.7) – (3.4) (88.4) (57.9) (21.6) (8.9) – 51.9 (578.2) (509.7) (11.5) (23.7) (33.3) 9.7 (202.8) (90.8) (43.4) (28.8) (39.8)

Net investment hedge The Group’s net investment hedge consists of debt issued in the same currency (€) as the net investment in Airtricity. The hedge compares the element of the net assets of Airtricity whose functional cash flows are denominated in € to the matching portion of the € borrowings held by the Group. This therefore provides protection against movements in foreign exchange rates. Scottish and Southern Energy 140 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

B. RISKS FROM USE OF FINANCIAL INSTRUMENTS (continued)

Gains and losses in the hedge are recognised in equity (2009 – £142.9m, 2008 – £30.1m) and will be transferred to the income statement on disposal of the foreign operation. Gains and losses on any ineffective portion of the hedge are recognised immediately in the income statement (2009 – £nil, 2008 – £22.2m loss). The loss recognised in the income statement in the previous year was considered to be exceptional as the Group has ensured that operations within Airtricity whose functional cash flows are denominated in pounds sterling have been matched by pounds sterling denominated debt.

(viii) Capital management The Board’s policy is to maintain a strong balance sheet and credit rating so as to maintain investor, creditor and market confidence and to sustain future development of the business. Details of the capital management objectives, policies and procedures are included in the Financial Management section of the Business Statement of this report.

From time to time the Group purchases its own shares on the market; the timing of these purchases depends on market prices. The use of share buy-backs is the Group’s benchmark for investment decisions and is utilised at times when management believe the Group’s shares are undervalued. No share buy-backs were made during the year.

On 7 January 2009, the Group conducted a book-built, non-pre-emptive placing of 42.0 million new ordinary shares. The shares were placed at a price of £11.40 each which was within 1% of the average closing price of the shares in the preceding four weeks. Based on this price, the gross proceeds of the placing were £479.0m, representing approximately 4.8% of the Group’s share capital. The shares carried the right to the interim dividend paid on 27 March 2009 and carry the right to subsequent dividends.

The placing of shares was one of a series of steps taken which reflects the Group’s flexible and prudent approach to financing investment. It also enhanced the group’s future options by providing additional sources of funding for appropriate investment and acquisition opportunities.

In summary, the Group’s intent is to balance returns to shareholders between current returns through dividends and long term capital investment for growth. In doing so, the Group will maintain its capital discipline and will continue to operate prudently within the current economic environment.

30. RELATED PARTY TRANSACTIONS

The following transactions took place during the year between the Group and entities which are related to the Group but which are not members of the Group. Related parties are defined as those in which the Group has control, joint control or significant influence over.

2009 2008 2009 Purchase of 2009 2008 Purchase of 2008 Sale of goods goods and Other Sale of goods goods and Other and services services transactions and services services transactions £m £m £m £m £m £m Jointly controlled entities: Seabank Power Limited 5.2 (82.4) 20.7 19.5 (150.6) 27.0 PriDE (South East Regional Prime) Limited 54.3 – – 39.2 – – Scotia Gas Networks Limited 59.0 (134.7) 35.0 56.0 (106.9) 35.3 Marchwood Power Limited – – 104.6 – – 2.7 Greater Gabbard Offshore Winds Limited 1.0 – – – – –

Associates: Barking Power Limited 0.7 (177.5) (0.1) 0.7 (85.0) 0.4 Derwent Co-generation Limited 37.4 (94.6) – 22.0 (82.2) – Logan Energy Limited 0.7 – – – – – Green Highland Renewables Limited 0.2 – – – – –

The transactions with Seabank Power Limited, Barking Power Limited and Derwent Co-generation Limited relate to the contracts for the provision of energy or the tolling of energy under power purchase arrangements. PriDE (South East Regional Prime) Limited operates a long-term contract with Defence Estates for management of MoD facilities in the South East of England. All operational activities are sub-contracted to the ventures partners including Southern Electric Contracting Limited. Scotia Gas Networks Limited has operated the gas distribution networks in Scotland and the South of England from 1 June 2005. The Group’s gas supply activity incurs gas distribution charges while the Group also provides services to Scotia Gas Networks in the form of a management service agreement for corporate services, stock procurement services and the provision of the capital expenditure on the development of front office management information systems. Sales of goods to related parties were made at an arms length price. The transactions with Marchwood Power Limited relate to fees and loan interest.

During the year, the Group paid non-refundable advance deposits of £2.3m (2008 – £nil) to Onzo Limited (an associated Company).

The balances outstanding with related parties at 31 March were as follows: Scottish and Southern Energy 141 Annual Report 2009

Consolidated Amounts owed by Amounts owed to related parties related parties 2009 2008 2009 2008 £m £m £m £m Jointly controlled entities: Seabank Power Limited 75.8 82.9 23.1 57.0 PriDE (South East Regional Prime) Limited 6.6 – – 0.4 Greater Gabbard Offshore Winds Limited 0.2 – – – Scotia Gas Networks Limited 305.2 303.7 0.3 0.4 Marchwood Power Limited 154.2 60.7 – –

Associates: Barking Power Limited 0.1 0.3 17.7 7.5 Derwent Co-generation Limited 8.3 0.1 9.5 9.5 Logan Energy Limited – – 0.1 –

The amounts outstanding are trading balances, are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties. Aggregate capital loans to jointly controlled entities and associates are shown in note 13.

During the year, the Company entered into the following transactions with its subsidiaries (note 14): 2009 2008 £m £m Company Loans granted to subsidiaries 330.0 – Loans repaid by subsidiaries 25.0 – Interest charged to subsidiaries 143.8 124.1 Sale of goods – – Purchase of goods – –

Balances outstanding at 31 March: Loan balances outstanding at the year end 1,388.1 1,083.1

Remuneration of key management personnel The remuneration of the executive directors, who are the key management personnel of the Group, is set out below in aggregate.

2009 2008 £m £m Short-term employment benefits 3.5 3.4

In addition, the key management personnel receive share based remuneration, details of which are found at note 28. Further information about the remuneration of individual directors is provided in the audited part of the Directors’ Remuneration Report. The key management personnel are employed by the Company.

Information regarding transactions with post-retirement benefit plans is included in note 27.

31. COMMITMENTS AND CONTINGENCIES FINANCIAL STATEMENTS

(i) Capital commitments 2009 2008 £m £m Capital expenditure: Contracted for but not provided 1,451.5 534.7

(ii) Operating lease commitments

(a) Leases as lessee: 2009 2008 £m £m Amount included in the income statement relating to the current year leasing arrangements Minimum lease payments – power purchase agreement 198.9 247.0 Other lease payments 21.7 21.9 220.6 268.9 Scottish and Southern Energy 142 Annual Report 2009 Notes on the Financial Statements (continued) for the year ended 31 March

At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: 2009 2008 £m £m Power purchase agreements Within one year 221.0 211.1 In second to fifth years inclusive 483.5 596.9 After five years 278.2 331.9 982.7 1,139.9 Other leases Within one year 23.1 16.9 In second to fifth years inclusive 32.3 25.1 After five years 87.0 72.0 142.4 114.0

Total Within one year 244.1 228.0 In second to fifth years inclusive 515.8 622.0 After five years 365.2 403.9 1,125.1 1,253.9

The average power purchase agreement lease term is 5 years.

The obligations under power purchase agreements with various power generating companies are not deemed to qualify as finance leases under IAS 17.

(b) Leases as lessor: The Group leases out two combined heat and power plants under finance leases. The future minimum lease payments under non-cancellable leases are as follows: 2009 2008 £m £m Within one year 0.3 0.3 In second to fifth years inclusive 1.0 1.0 After five years 0.5 0.8 1.8 2.1

During the year ended 31 March 2009 £0.3m was recognised as rental income in the income statement (2008 – £0.3m). Lease payments are straight line over the term of the lease. The Company has no operating lease commitments as either a lessee or a lessor.

(iii) Guarantees and indemnities Scottish and Southern Energy plc has provided guarantees on behalf of subsidiary and associated undertakings as follows:

2009 2008 £m £m Bank borrowing 18.3 34.9 Performance of contracts 2,309.0 588.7 Purchase of gas 70.5 120.5

Following the acquisition from Fluor International Limited of their 50% stake in Greater Gabbard Offshore Winds Limited in April 2008, the Company entered into guarantees in respect of 100% of the major contracts for this project which is reflected in the above guarantees. Following the sale of 50% to RWE npower renewables Limited in November 2008, the Company is now indemnified for 50% of these guarantees.

In addition, unlimited guarantees have been provided on behalf of subsidiary undertakings in relation to four contracts in respect of performance of work and any liabilities arising. Southern Electric Power Distribution plc and the Company have provided guarantees to the Southern Group of the ESPS in respect of the funding required by the scheme.

Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. Scottish and Southern Energy 143 Annual Report 2009 Shareholder Information

Company Website – In March 2008 the company wrote to minor differences in name and address www.scottish-southern.co.uk shareholders as part of a so-called details. Shareholders can merge multiple The company’s website contains a ‘Deemed Consent’ mailing with details of share accounts by completing a Multiple wide range of information including a the different means by which the company Share Account Form. Shareholders can dedicated Investor Centre section where could inform them of the availability of obtain a form by calling the registrar’s shareholders can find more information shareholder documentation. These were dedicated shareholder helpline on about the services available to them, notification of availability of documentation 0845 143 4005. download forms, view and update their by means of (1) email alert (2) letter or shareholding online, manage their (3) by the issue of the documentation A donation of £2 will be made to WWF’s portfolio and view share price and in printed form. International Forest Programme for every dividend histories and trading graphs. merged share account. As a result of this programme Shareholder Services approximately 41,000 (of 370,000) Dividend Reinvestment Plan (DRP) Scottish and Southern Energy offers shareholders chose option (1). A further The DRP is a simple and cost effective a number of services including: 250,000 shareholders receive written way to build a shareholding in the notification of the electronic availability company by using cash dividends k elect for eCommunications; of shareholder communications (option 2). to buy additional shares. Shareholders k telephone and internet share dealing can join the DRP by downloading a services with ShareGift option; In recognition of the reduced environmental Dividend Reinvestment Plan Mandate k merge multiple share accounts; and impact arising from these forms of Form and Terms and Conditions from k dividend reinvestment plan. communication the company, on behalf www.scottish-southern.co.uk>investor of shareholders, has donated over £90,000 centre>shareholder services>dividend Further information on these services to the World Wildlife Fund’s (‘WWF’) reinvestment or by telephoning the and other services can be found International Forest Programme since shareholder helpline on 0845 143 4005 on the company’s website at offering this alternative last year. At present to request a form. www.scottish-southern.co.uk> around 80,000 shareholders receive a investor centre>shareholder services. printed copy of the Annual Report. Share Dealing Service A telephone share dealing service has Shareholder Enquiries eCommunications Programme been arranged with Stocktrade which Shareholders can contact the registrar, Shareholders who have not previously provides a simple way of buying or selling Computershare Investor Services PLC signed up to the Deemed Consent Scottish and Southern Energy plc ordinary (Computershare), by phoning the dedicated programme can sign up by visiting the shares. Full details can be obtained by shareholder helpline on 0845 143 4005, website www.scottish-southern.co.uk/ telephoning 0845 601 0995 and quoting or writing to them at: The Pavilions, ecomms. Shareholders will be asked reference ‘Low Co 33’. Bridgwater Road, Bristol BS13 8FB. to provide their Shareholder Reference Number. Also, Computershare Investor Voting Electronically Services PLC offer telephone and The website and the Guidance Notes Benefits of eCommunication internet share dealing services to on the reverse of the Proxy Form contain k Shareholders will receive email buy or sell SSE ordinary shares. information on how shareholders can notification of the availability of the Further details can be obtained from appoint their proxy electronically. Online half year results and have access www.computershare.com/dealing/uk proxies can be checked and updated up to annual reports and company or by telephoning 0870 703 0084. until 12 noon on 21 July 2009 (48 hours announcements. prior to the AGM). k Shareholders can lodge their proxy The value of shares can fall and appointments securely over the shareholders may get back less than Share Price Information internet. they invest. Shareholders should consult The share price of Scottish and k A donation of £2 will be made to WWF’s a professional adviser authorised under Southern Energy appears on International Forest Programme. the Financial Services and Markets Act www.scottish-southern.co.uk. 2000 if they are in any doubt about the It also appears in the financial columns Keep us Informed suitability of an investment. of the national press and on various Where delivery of an email fails, the broadcast interactive services. company is required to recommence Financial Calendar sending paper copies of documents. Annual General Meeting Company Communications Shareholders can help avoid this by: 23 July 2009 Since 2000 companies have been able to communicate with shareholders k keeping the company informed of Ex dividend date electronically with regard to certain changes to email addresses by visiting 19 August 2009 types of documentation. Provisions www.scottish-southern.co.uk/ecomms of the Companies Act 2006 (which and following the instructions under Record date came into force in January 2007) ‘address change’; and 21 August 2009 enable companies to use electronic k regularly clearing out email inboxes. communications with shareholders Final dividend payable SHAREHOLDER INFORMATION SHAREHOLDER INFORMATION as the default position, so long as Multiple Share Accounts 25 September 2009 shareholders are informed of the options If you receive more than one Annual available to them with regard to the Report mailing, this may be due to having Half-year results announcement availability of shareholder documentation. more than one share account due to 11 November 2009 Scottish and Southern Energy 144 Annual Report 2009 Shareholder Information (continued)

The Group’s half-year results will be published on the company’s website at www.scottish-southern.co.uk on 11 November 2009 and will detail ex dividend and record dates for the interim dividend payable in March 2010. Paper copies of the half-year results are not distributed to individual shareholders, although shareholders who have elected for eCommunications do receive notification of the half-year results on the company’s website.

Copy Reports Copies of the Annual Report and Accounts 2009 can be obtained, free of charge, from the Company Secretary, Scottish and Southern Energy plc, Inveralmond House, 200 Dunkeld Road, Perth PH1 3AQ or by accessing the company’s website at www.scottish-southern.co.uk.

The company’s Corporate Responsibility Report 2009 can be viewed at www.scottish-southern.co.uk.

Image on page 10 reproduced by permission of the British Geological Survey. © NERC. All rights reserved. IPR/111-62C Designed and produced by Tayburn Corporate Key Performance Indicators Scottish and Southern Energy plc Scottish and Southern Energy

Adjusted Profit Before Tax* – £m Operating Profit* – £m

2007 2008 2009 2009 1,253.7 Generation and Supply 632.5 711.1 832.0 Energy Systems 471.1 544.4 584.2 2008 1,229.2 Scottish and Southern Energy plc 2007 1,079.3 Gas Storage 55.9 50.9 42.7 Annual Report 2009 15.5 2006 873.9 Telecoms 13.9 14.3 Contracting, Connections Annual Report 2009 2005 732.1 and Metering 61.7 68.7 74.8

Dividend – pence per share Dividend – composition

66.0 Interim 30% (19.8 pence) 60.5 Final 70% (46.2 pence) 55.0 46.5 42.5 37.7 35.0 32.4 30.0 25.7 27.5

200019992001 2002 2003 2004 2005 2006 2007 2008 2009

Energy Customer Numbers – millions Energy Customers Numbers – composition

2009 9.05 Electricity (residential) 56% (5.10 million) 2008 8.45 Gas (residential) 2007 7.75 39% (3.50 million) 2006 6.70 Electricity and Gas (business) 2005 6.10 5% (0.45 million)

Capital Expenditure – £m Capital Expenditure 2008/09 – %

2009 1,279.8 Thermal Generation 17 Producing energy in a more sustainable way with new 2008 810.3 Renewable Generation 41 developments like the Glendoe hydro electric scheme. 2007 663.4 Power Systems 25 2006 502.1 Gas Storage 4 Other 13 Helping make electricity and gas more affordable 2005 383.5 by offering a ‘better plan’ and installing insulation.

Stock code 008229 In producing this report we have chosen production methods Corporate Responsibility which aim to minimise the impact on our environment. The Ensuring electricity supply is reliable through investing For further information about paper chosen – Revive 50:50 Silk – contains 50% recovered 2005 2006 2007 2008 2009 Scottish and Southern Energy, please contact: waste and conforms to government requirements for in networks in England and Scotland. recycled paper. It is also certified as an FSC mixed sources Lost-time and Reportable Accidents – per 100,000 hours worked Scottish and Southern Energy plc grade. Both the paper mill and printer involved in this (2007-2009 figures show Total Recordable Injury Rate) N/A 0.08 0.05 0.04 0.07 Corporate Affairs production are environmentally accredited with ISO 14001. Inveralmond House The printer is also registered as a Carbon Neutral company. Providing more capacity for the UK to maintain dependable 0.49 200 Dunkeld Road Power Station CO2 Emissions – kilograms per kWh N/A 0.62 0.55 0.50 Perth PH1 3AQ supplies of gas through development at Aldbrough. Customer Minutes Lost – SEPD 84 71 72 67 66 T: +44 (0)1738 456000 Customer Minutes Lost – SHEPD 82 65 77 72 75 E: [email protected] W: www.scottish-southern.co.uk Registered in Scotland No. 117119